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Latest PMI data could tip the scales for an August rate cut

Journalist: John Choong (Head of Markets and Research), Newspage

ended 24. July 2024

Odds of an August rate cut were at 45% yesterday, but the chances of a Bank Rate reduction improved today on the back of this morning’s encouraging Purchasing Managers Index (PMI) numbers.

The S&P Composite Flash PMI for July showed that the UK economy expanded yet again, and at a slightly faster pace than last month (52.7 vs 52.3). Both the manufacturing (51.8 vs 50.9) and services (52.4 vs 52.1) sectors grew from June. A goldilocks scenario has emerged as output inflation (prices charged) slowed to its weakest in over 3 and a half years, while the economy continues to grow.

Today's flash PMI data lays out the best possible scenario for Britons — a growing economy and cooling inflation. Given how services inflation has remained the stickiest and most concerning point for the Monetary Policy Committee (MPC), this will be music to borrowers' ears.

New contracts rose at a significant pace from the previous month, which drove higher demand for service providers to increase their staffing numbers. While this may initially alarm some MPC members given the tight labour market data, they'll be encouraged by the fact that input cost inflation eased to a 41-month low thanks to lower costs of wages.

Considering that the bulk of costs for service providers stem from labour, the lower costs of wages is a welcoming development. This trend also falls in line with the PAYE estimates from the latest labour market data which saw median pay decline from June. Consequently, services inflation is expected to follow suit in the coming months.

As a result, business confidence rebounded from its dip in June amid expectations of improved business and demand conditions, higher investment, interest rate cuts, and lower concerns of political instability with a new Labour government now in power.

That said, costs remained high due to supply chain challenges in the manufacturing sector due to rising expenses related to global freight issues. But with freight rates beginning to come off their highs, there's an element of hope that the worst could be over.

Given that this is the final UK macro dataset published before August's MPC meeting, whether it tips the scales in favour of a rate cut will be revealed next Thursday.

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5 responses from the Newspage community

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Justin Moy
Managing Director at EHF Mortgages
Flipping a coin seems to be about the only way to predict a base rate cut this time around. Inflation cooling is hopefully the phrase that will pave the way for base rate stimulus. Ultimately, those higher rates are designed to slow inflation down. With a more settled economy and the effect of a new government, there is every reason that a base rate cut can be delivered that will benefit businesses and borrowers alike.
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Katy Eatenton
Mortgage & Protection Specialist at Eatenton Finance
I predicted an August rate cut and it’s looking more likely now. Lenders are dropping rates, which also confirms they are optimistic with the direction of interest rates for the summer.
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Keith Budden
Managing Director at Ensurety
I think these latest PMI figures are excellent news. Given the increased positivity in the business marketplace, with inflation holding steady at 2% and (whether you voted for the new Government or not), the effect of the General Election giving us a Government with a huge majority has brought a sense of stability, and the action of Keir Starmer last night of rapidly removing the whip from his dissenters, shows a willingness to take rapid action which has been sadly absent under the Sunak and Truss regimes. Hopefully the Monetary Policy Committee will take this as the kick it needs to trigger a cut in the base rate. Perhaps as well it will learn from the model of the new Government and be proactive rather than reactive — and largely very slowly reactive at that. Sometimes it's felt as if you'd get a faster reaction tickling a statue with a feather.
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Michelle Lawson
Director at Lawson Financial
Some positive news at last for the downtrodden economy. Hopefully the Bank of England will see this as a green light for a much-needed rate cut on 1st August, and they don't act with amber caution and delay further and potentially cause more damage. Confidence in Threadneedle Street isn't exactly overbrimming so a move could trigger the start of the good times and reset the public's perception.
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Daniel Wiltshire
Actuary & IFA at Wiltshire Wealth
I wouldn't hold your breath. The Governor has a habit of being stubbornly behind the curve and the MPC may decide to wait until after Labour's first Budget in the Autumn.