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UK in Focus: Essential economic news for businesses
There have been some signs of resilience heading into the latest shock but sentiment has tumbled as price pressures intensify. The BoE is focused on the risk that this latest bout of inflation becomes embedded in wages.
Some demand resilience, but price pressures intensify
The UK economy reported the fastest pace of growth since April 2025 in the three months to February. That means the UK had a firm base heading into the latest period of uncertainty. In fact, activity surveys in April continued to report a degree of demand momentum. The manufacturing sector PMI jumped to 53.7, bolstered by new order growth, while the services sector reported higher business activity with a PMI of 52.0. However, reports of inventory accumulation ahead of expected supply disruption likely overstate activity momentum. Retail sales demand was also flattered by a degree of panic buying of motor fuel, +3.2% m-o-m in March, while overall, retail sales volumes excluding fuel grew a meagre 0.2% m-o-m.
Elsewhere, consumer confidence fell further in April, taking sentiment to its lowest level in over two years. It’s no surprise that facing another inflation shock has left consumers particularly cautious about the future state of the economy, and their own personal financial situations, for the latter, the net balance fell back negative. Savings intentions also rose, new-buyer enquiries for home purchases fell to their lowest level since August 2023 in March, and medium-term inflation expectations have spiked higher.
While the initial volatility across both household and business surveys may subside in the coming months, energy prices and supply disruption will continue to pass through the global economy for a while yet. And early indicators suggest agents have a greater sensitivity to price rises with a degree of pass-through evident despite the prospect of softer demand – see chart.
For the Bank of England, the extent to which the latest price shock translates into domestically driven inflation will determine the policy response. In our view, the risk of any second-round inflationary effects is smaller than in recent years, and at its latest policy meeting, the BoE seemed to agree. Nonetheless, the BoE’s scenarios showed how different assumptions on second-round effects, namely through higher wage growth, would require greater interest rate hikes. Such effects can take well over a year to materialise, but if the central bank were to wait for that, it may need to respond more aggressively than otherwise needed; therefore, hikes sooner to mitigate the risk are more likely.
For now, market expectations of rate hikes have tightened financial conditions, meaning the BoE may opt to wait and see in the hope of greater clarity on the conflict, and to see how households and businesses respond.
With that said, unless there is a swift resolution to the conflict and a reopening of the Strait of Hormuz, we expect the BoE to need to raise Bank Rate in the summer. The rate of inflation is set to accelerate, and with households and businesses more sensitive to higher prices, we think policymakers are likely to opt to lean against the risk that higher inflation now becomes embedded within household and business price expectations.
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The following analyst(s), economist(s), or strategist(s) who is(are) primarily responsible for this report, including any analyst(s) whose name(s) appear(s) as author of an individual section or sections of the report and any analyst(s) named as the covering analyst(s) of a subsidiary company in a sum-of-the-parts valuation certifies(y) that the opinion(s) on the subject security(ies) or issuer(s), any views or forecasts expressed in the section(s) of which such individual(s)is(are) named as author(s), and any other views or forecasts expressed herein, including any views expressed on the back page of the research report, accurately reflect their personal view(s) and that no part of their compensation was, is or will be directly or indirectly related to the specific recommendation(s) or views contained in this research report: Emma Wilks.
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