Euro Update – 14 May 2024

The Bank of England held rates steady as expected yesterday afternoon. Interest rates have remained at the 16-year high of 5.25% for the last six meetings as the central bank’s monetary policymakers wait for the threat of high inflation to diminish.
While the rates remained unchanged, the focus was on the Bank of England’s accompanying commentary, which markets hoped would provide a glimpse into the central bank’s potential actions in the coming months.
Governor Andrew Bailey’s comments were described as more optimistic, hinting at a possible rate cut in June. He stated that a cut at the next meeting was neither “ruled out” nor “fait accompli”, and it was “likely that we will need to cut bank rates over the coming quarter, possibly more than currently priced into market rates.”
Another notable deviation from previous meetings was the voting split. Seven members of the Monetary Policy Committee voted in favour of holding rates, with two voting for an immediate rate cut, a change from the eight to one split in the last meeting. Markets are now divided on what to expect from June’s MPC meeting, with the probability of a cut currently standing at 58.9%.
The outlook for interest rates has changed significantly since the beginning of the year. Currently, only two rate cuts are priced in for 2024, which would see interest rates fall by 0.5%. This forecast is a stark reduction from January, where the market initially expected six cuts in 2024, which would have meant a 1.5% drop across the year.
If the Bank of England does cut rates in June, it would see the BoE take a similar path to the European Central Bank, which is expected to make its first cut two weeks earlier. However, most economists still seem to expect the BoE to wait until August or September before reaching a committee vote that favours a rate cut, slightly ahead of the Fed, which isn’t expected to make its first cut until November.
The Bank of England’s rate meeting was closely followed by the latest UK GDP growth data, which was released this morning at 7am. The ONS data estimated economic growth of 0.6% January-March. The estimates also reflect 0.2% growth compared to the same quarter one year ago. This indicates that the UK has come out the technical recession it entered into at the end of 2023.
Last week, growth forecasts from the Eurozone’s four major economies beat their forecasts and contributed to the Eurozone posting growth of 0.3% between January and March. Annual CPI figures were also released for Germany and Spain and came in under forecasts 2.2% and 3.3%, respectively, while the Eurozone CPI Flash estimate came in as expected at 2.4%.
With a French bank holiday on Wednesday and Thursday and a German bank holiday on Thursday, it was another quieter week of Eurozone data releases.
The only data out of note set for release this week was HCOB German services and composite PMIs, which were published on Monday. The data came in largely close to expectations, with services and composite readings posting 53.2 against the expected figure of 53.3 and 50.6 against 50.5, respectively.
The HCOB Eurozone services and composite PMIs came in above forecasts at 53.3 and 51.7, respectively. Other data releases this week include German Factory orders, which came out this morning at -0.4 % against forecasts of +0.4%, and finally, German Industrial production, which was released on Wednesday coming in slightly above forecast at -0.4%.