Chief economist update: Rush hour is over for the BOE

We are one and we are many, and all of us don't expect any movement from the Reserve Bank of Australia (RBA) when it meets at 2.30pm today for its monthly monetary policy deliberations.

Yes Virginia, RBA Governor Philip Lowe has already gone on record that the next move in interest rates will be up but financial markets don't expect the "up" until around the second quarter of next year.

But economies don't operate in a vacuum. There will be headwinds and tailwinds that disrupt the expected trajectory of economic and business activity for bad or good and monetary policy would be adjusted accordingly.

Such is the case for the UK and the Bank of England (BOE). A few months before its 10 May meeting, the British central bank signalled that another small increase in interest rates is nigh, sparking speculations that it will raise the Bank Rate by 25 basis points that day. It didn't.

I'm tempted to scribble, it did nothing but then it's more accurate to say that the BOE reacted to changed developments in the UK economy.

UK GDP growth slowed to an annual rate of 1.2% in the March quarter from 1.4% in the year to the December 2017 quarter. This is the slowest growth rate since the June 2012 quarter and marked the fourth straight quarter of decelerating year-on-year expansions.

In his post-meeting press conference, BOE Governor Mark Carney stressed that the slowdown is due to adverse weather in February and March and that underlying growth is much more resilient, citing the strong labour market and that while Brexit uncertainty continues as a drag on growth, it's not intensifying.

However, the details of the UK National Accounts are worrying. Household spending growth slowing to a mere 0.2% in the three-months to March - the slowest in over three years - following 0.3% growth in the each of the previous three quarters. In addition, business investment fell by 0.2% in the March quarter - the sharpest decline since the third quarter of 2015.

Still, as Carney reasoned, the country's robust labour market - the unemployment rate remained at a 42-year low of 4.2% in the three months to March - and the lead from the CIPS Survey where both the manufacturing and services sectors remain at expansion territory, should provide good growth underpinnings in the coming months.

What has significantly changed that prompted the BOE to change its mind is the quickening deceleration in UK inflation. Headline CPI has slowed to 2.4% in the year to April from the six-year high of 3.0% recorded at the beginning of 2018.

More important, the core CPI inflation rate has dropped to the BOE's target rate of 2% in April, the third straight month of deceleration from January's 2.7% rate.

With economic activity and inflation in the UK slowing, the BOE would no longer be in a hurry to raise interest rates. Certainly not at its Monetary Policy Committee meeting scheduled for June 21.

Ben Ong is the Director of Economics and Investments at Rainmaker Group. He previously worked as a fund manager, economist, asset allocation strategist, portfolio analyst and stock market analyst. Check out his economics analysis here.

Read more: Bank of EnglandBank RateBOE Governor Mark CarneyCIPS SurveyHeadline CPIHouseholdMonetary Policy CommitteeRBA Governor Philip LoweReserve Bank of AustraliaUK GDPUK National AccountsUnited KingdomYes Virginia
Link to something 7vPuhdrT