Inflation and Prices:
- Bailey expects inflation to drop to about 7% in July and to around 5% by October.
- A more gradual decrease in energy prices compared to the Euro Zone contributes to this trend.
- Food and drink inflation seems to have peaked, with an expectation for food price inflation to gradually fall this year. However, the decline of food price inflation has been slower than anticipated, partly attributed to global factors like less impactful Russian restrictions on grain exports.
- For non-energy prices, it’s less clear how quickly they will reduce.
- Despite volatile elements, a persistent strength in service price inflation could suggest a continuation of high inflation.
Monetary Policy:
- Bailey acknowledges the clear impact of the higher bank rate, affirming that there’s more than one path for rates that could bring inflation back on target.
- The BOE will assess the most suitable path for rates based on evidence.
- There’s a need to balance risks, as some risk relative to May has materialized.
- A 50 basis point rate increase was not deemed necessary at this time. The central bank is not at its peak on rates and remains evidence-driven, with no set path for interest rates from here.
- It’s too soon to speculate on when the BOE might cut rates.
Labour Market and Wages:
- The condition of the labour market and pay rates have a significant impact on the economy.
- Recent pay growth is considerably above the Bank’s May forecast, suggesting that secondary effects of wage inflation might take longer to fade.
- Despite other elements of the labor market softening, the pay element has not.
Economic Growth and Resilience:
- Projections for economic activity have weakened since May, with some unpleasant surprises in June but also some recovery.
- Unemployment remains historically very low, demonstrating the resilience of the economy.
- Despite the challenges, Bailey avoids describing the impact of the policy as “painful” and hopes to achieve the expected path without a recession.
Housing Market:
- Bailey doesn’t perceive the situation as a crisis for the housing market.
BOE Deputy Gov. Ramsden on QT said:
- The Bank of England has not made a decision on the pace of Quantitative Tightening (QT) for September.
- Ramsden personally sees a case for slightly increasing the pace of QT.
- He notes that bond markets are reacting to developments, including those in the US.
- Ramsden doesn’t believe there’s a structural change occurring in the bond market.
The GBPUSD trade to a new low going back to June 30 during the rate hike/press conference 1.26194. That move took the price between a swing area at 1.2599 up to 1.26238 (see red numbered circles on the chart below).
The price has seen a rebound and currently trades at 1.26766. That takes the price back within a swing area between 1.2681 and 1.26988. It would take a move back above that swing area (say above the 1.27000 level) to give debt buyers some satisfaction (it’s a start). Yesterday the low stalled near the low of that swing area and bounced.