"If the economy is beating inflation and tolerating much higher rates than it has done for over a decade, why cut?"
- Derrick Dunne, CEO of YOU Asset Management
UK GDP grew by 0.4% month-on-month in May, following no growth in April, the latest ONS statistics show.
Services output grew by 0.3% in May and was the largest contributor to monthly GDP growth for the month. Production output recovered with 0.2% growth following a fall of 0.9% in April, while construction output grew by 1.9% compared with a fall of 1.1% the previous month.
GDP is estimated to have grown by 0.9% in the three months to May compared with the previous quarter, driven by a growth of 1.1% in services output.
First quarter GDP growth has been revised up to 0.7% and annual GDP growth now stands at 1.4%.
However, as a result of higher-than-expected economic growth, some economists now predict that the Bank of England could hold off on reducing Bank Rate until later this year.
Derrick Dunne, CEO of YOU Asset Management, commented: “These surprise growth figures for GDP, particularly considering it is the best growth over three months for more than two years, are creating a huge conundrum for the Bank of England. If the economy is beating inflation and tolerating much higher rates than it has done for over a decade, why cut?
“We saw hesitancy from the MPC in June, which drew criticism owing to the General Election campaign going on around it. But these figures seem to confirm that hesitancy is probably no bad thing. If the economy is able to tolerate higher rates then there’s no clear argument for cutting as quickly as needed. As such, cuts are beginning to look ever further away.
“To see real evidence that rate cuts are required, we’d have to see significant deterioration in employment, which so far isn’t forthcoming. Keeping rates higher just gives the Bank more dry powder when the economy finally does falter."
Rob Morgan, chief investment analyst at Charles Stanley, agreed, stating: "CPI inflation falling back in line with the 2% target, a tentative first 0.25% reduction from the current 5.25% is around the corner. However, this more robust growth picture may just tilt the balance away towards September rather than August for the first cut."
Susannah Streeter, head of money and markets at Hargreaves Lansdown, said: This snapshot of an economy growing a bit faster than forecast, could make Bank of England policymakers that bit more reticent about voting for an interest rate cut on 1 August. Huw Pill, the Bank of England’s chief economist, is the latest to warn about the persistence of inflation in a speech yesterday in London, with hot wage growth still a concern. Although he stressed it was a question of when, not if, interest rate cuts will come, the possibility of a summer rate cut is fading, with a vote on 1 August expected to be on a knife-edge. Financial markets now estimating that there’s a 52% chance the Bank’s monetary policy committee will vote to lower the base rate at the next meeting. Before Huw Pill spoke the probability of a cut stood at more like 60%."
George Lagarias, chief economist at Forvis Mazars, added: “The UK economy is finally getting out of its rut. UK output for May doubled expectations, growing by an estimated by 0.4% for May. The GDP number surprised on the upside, for the second time in three months. Right now, the British economy is at a sweet spot. It is growing fast enough to recover from a recession, but not yet at a pace which would prohibit rate cuts later this year. We still think that the Bank of England will likely perform at least one rate cut in 2024, and it may do so against an improving economic backdrop.”
