The UK's economy shows signs of robust recovery from the 2023 recession, with Q1 witnessing a 0.6% GDP growth driven by private investment. Despite a slowdown expected post-Q1, the economy should continue to grow near its long-term potential, though restrictive monetary policy remains a challenge.

The Bank of England is expected to maintain its Bank Rate at 5.25% on June 20th. Since the last meeting, where 2 out of 9 Monetary Policy Committee members favored a 25bp rate cut, inflation and wage data have continued to exceed expectations. Consumer price data for May, released this morning, show that headline inflation is back on the BoE 2% target for the first time in three years. However, May’s data also reveal resilient underlying inflationary pressures (“core” CPI +0.5% in May, +3.5% YoY) that should lead the BoE to remain on hold for the time being. The vote split for the likely "no change" decision could offer clues about potential shifts in MPC members' views. While growth and underlying inflation drivers suggest a delay in rate adjustments, the Bank is expected to wait until its September 18th meeting to begin reducing the Bank Rate.

The August 1st meeting is probably too soon for such decisions, and the Bank may seek further clarity on the policies of the new government post-July 4th elections. Nonetheless, the trend towards a recalibration of interest rates in the medium term is clear. The UK's monetary policy needs to remain restrictive for now, and any rate cuts must await a sustained easing in inflationary pressures.

Despite a strong start in June, UK government bonds have shown a tepid performance, with continued negative returns year-to-date. Market anticipation of BOE actions has shifted throughout 2024, now expecting a slower pace of rate cuts.

Chart 4: Market Expectations for BoE Official Bank Rate: Today vs. December 2023

Source: Bloomberg

Finally, the differential between 5-year US and UK yields, which has tightened since the last meeting, illustrates the contrasting economic trajectories of the UK and US, aiding in the slight strengthening of the GBP.