Comments from the Bank of England Governor indicate that recent interest rate decisions were shaped more by domestic conditions than by tariffs. Inflation has remained steady, but the labour market has eased a bit. Wage growth is still higher than what would normally align with a 2% inflation target, although it has slowed more than expected since February. Even with the highest core inflation rate among major economies, predictions for the June rate decision are still uncertain. It’s anticipated that rates will remain stable, in line with market expectations. However, interest rates are generally trending downwards, though the details of this decline are unclear due to international uncertainties.

Global Trade Impact

Disrupted global trade is hurting overall growth and causing UK businesses to hesitate on investments. The effect on prices is mixed, and we are not seeing the same supply chain issues or inflation spikes that we did in 2021. Before the May policy decision, the Governor was cautious, weighing several unstable factors that are affecting the economy. What we have observed so far indicates that the UK’s monetary policy is still firm but starting to lean toward eventual easing—though this process is not straightforward. Bailey emphasized that the Committee didn’t just react to global factors like tariffs but considered the domestic economy’s nuances. Labour availability has tightened, and wages aren’t growing as quickly as earlier in the year, suggesting a softening in household demand. Yet, wage increases are still higher than what would be ideal for stable inflation. Although they have slowed, they remain above the 2% target, indicating that the downward pressure on inflation is not strong enough to cause a quick policy change. It isn’t just about whether the job market is strong or weak; the pace of change hasn’t been enough to justify a significant shift. From our perspective, this does not support an abrupt change in interest rates. There’s an interesting disconnect right now. Core inflation remains high compared to other countries, yet the domestic pay growth keeping those prices high is declining. This inconsistency complicates predictions about future policy easing. In practical terms, calls for a rate cut in June seem premature. Markets are expecting stability, which is unlikely to change unless there are significant developments.

Global Demand Backdrop

Another factor adding to the uncertainty is the global demand environment. The fragmentation in international trade—due to policy differences and geopolitical issues—has removed some advantages for UK exports. This disruption hinders investment planning, especially for businesses that rely on international trade. We’ve noticed that companies are hesitant to invest, which negatively impacts productivity. However, even with slower business investments, we are not experiencing the price spikes that disrupted supply chains a few years ago. This situation helps maintain some stability in input cost forecasts. Currently, major inflation pressures are more related to services and wages than to transportation or commodity shortages. The Governor’s last-minute change on the latest vote underscores the careful nature of their decision-making. This wasn’t just a simple pause; it was a measured response based on evidence that is softening—but not rapidly enough for decisive action. For us, this means that any sudden changes in rate expectations remain unwarranted until data shows more concrete shifts. In the near future, we expect the risk profile to stay stable, unless unexpectedly high wage or inflation data emerges. Global uncertainties still pose challenges, but they are not influencing the system as they once did. This suggests that current strategies should focus on interest rate stability while remaining flexible as the global situation evolves. Create your live VT Markets account and start trading now.

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