Note, too, that the upward shift in market expectations for the path of bank rate will intensify the pass through of restrictive rates to households and businesses, as higher risk-free rates push up borrowing costs more broadly.
Will the recent strength in activity get in the way?
One additional consideration is the recent momentum in the economy: Q1 GDP came in at 0.6 per cent quarter-on-quarter, the strongest quarterly increase since 2021, when the UK economy was still recovering from the pandemic, and well above the expectation of 0.4 per cent.
Might stronger demand put upward pressure on domestic prices? We doubt it. Momentum looks set to slow from here; the quarterly pace of growth looks set to drop to 0.2 per cent and then hover around 0.3 per cent over the remainder of the year.
And the BoE was quick to highlight in the latter part of last year that it would not respond directly to the small decline in growth, suggesting it will look through any payback on the way back up.
Will the BoE be able to diverge from the Fed?
The answer to this is yes. Despite the stickiness in April, we still think the dynamics in the UK economy differ from those in the US.
The UK is only just emerging from a (mild) recession, albeit more vigorously than most thought, wage growth does appear to have turned a corner, and headline CPI inflation is still close to target, despite coming in above expectations.
In addition, recent comments from the governor stating that “there is no law which says that the [Federal Reserve] must move first and everyone else including us moves afterwards”, reaffirms to us that the MPC is happy to move before the Fed if needs must.
Indeed, the BoE started tightening before the Fed. The extent to which the BoE will cut before the Fed starts is probably a more valid question.
In turn this would be a function of sterling’s reaction and there we must also consider developments against an European Central Bank that looks set to begin loosening in June.
Moreover, we think that the Fed will begin to cut rates in September (and again in December), presenting little obstacle to the MPC.
We expect two additional cuts in the UK this year in September and November.
Gabriella Dickens is a G7 economist at Axa Investment Managers
