Monthly Cash Review - GBP State Street GBP Liquidity LVNAV Fund, March 2024
At the Bank of England (BoE) Monetary Policy Committee (MPC) meeting on 21 March, the base rate was maintained at 5.25%, in line with expectations, by vote margin of 8-1. Catherine Mann and Jonathan Haskel, who had previously voted to increase rates in February, joined with the majority, while Swati Dhingra was the sole dissenter in voting again for a 25 basis point (bps) cut.
Economic Data
- Headline inflation fell from 4.0% in January to 3.4% in February, versus consensus expectations of 3.5%. This was driven by base effects given the run-off of the unusually large price rises in February 2023. Core inflation fell from 5.1% to 4.5%, versus consensus expectations of 4.6%. Services inflation dropped from 6.5% to 6.1%, which left it in line with the BoE’s forecast of 6.1%.
- GDP for Q4 2023 was unrevised at -0.3%, confirming that the UK was in recession in the second half of the year. GDP for January expanded by 0.2%, in line with consensus. This was driven by a 0.2% rise in services output, with construction output rebounding by 1.1%.
- The composite purchasing managers’ index (PMI) fell marginally from 53.0 in February to 52.9 in March, versus consensus expectations of 53.1. Readings above 50 are indicative of economic growth. Services activity slowed from 53.8 to 53.4, while the manufacturing PMI rose from 48.3 to 50.2.
- The unemployment rate rose from 3.8% in December to 3.9% in January. The growth rate for private sector earnings excluding bonuses, which is the BoE’s preferred measure, declined from 6.2% to 6.1%, which is still above the BoE’s forecast level for December 2023 of 6.0%.
Spring Budget
The reduction in national insurance tax provided the bulk of the net fiscal giveaway of £13.9bn (0.5% of GDP) in 2024/25. This may help lift the economy out of its mild recession before an election later this year. In order to help fund these tax cuts, the Chancellor announced revenue-raising measures in later years.
Forecasts
The Office for Budget Responsibility’s (OBR) now expects inflation to fall to below the 2.0% target in Q3 2024, to a trough of 1.1% in Q1 2025 and to remain below 2.0% until 2027. GDP growth was revised up for 2024 and 2025 from 0.7% and 1.4% to 0.8% and 1.9%, respectively.
Outlook
The markets interpreted the 8-1 vote from the MPC as a dovish signal, with not a single vote in favour of a hike. However, the guidance was essentially unaltered from the previous meeting. The MPC stated in its policy statement that key indicators of inflation persistence remain elevated, and that policy will be “restrictive for sufficient long” and “restrictive for an extended period”. The MPC also noted that “the restrictive stance of monetary policy is weighing on activity in the real economy, is leading to a looser labour market and is bearing down on inflationary pressures”. The BoE Governor Andrew Bailey noted that “we are not yet at the point we can cut rates, but things are moving in the right direction”. He also stated that market views on rate cuts are “reasonable” and that the Bank is “on the way” to winning the inflation fight.
From an economic data perspective, GDP for January combined with the composite PMI still suggest that the UK economy has probably moved out of recession. Inflation continues to fall and while services inflation remains high, it is in line with BoE expectations. Wage growth has slowed, but it remains well above the rates of 3.0-3.5% that are broadly consistent with the 2.0% inflation target, and the 9.8% rise in the minimum wage on 1 April will be an added pressure. The next MPC meeting is on 9 May, when the March inflation and February wage data will be available. However, the MPC may prefer more details of the early year wage negotiations. The April wage data will not be available until the June meeting. Market implied rates (Figure 1) moved in line with the BoE messaging and economic data. The implied rate for May 2024 remained relatively stable, finishing the month at 5.14%. The market expects the rate to be cut in June with an implied rate of 5.01%. The year-end implied rate finished the month at 4.45%.
Forecast are based upon estimates and reflect subjective judgments and assumptions. There can be no assurance that developments will transpire as forecasted and that the estimates are accurate
Fund
Following the 21 March MPC policy meeting, June remains the favoured month for a first cut in policy rates by the BoE. With uncertainty around the timing of the first cut and the total number of cuts for 2024 remaining high, fund investments continue to favour adding duration (6+ months) using high credit quality to lock in yield. A laddered investment approach to shorter duration credits (sub 3 month) was maintained as the yield curve continues to shift. The fund’s weighted average maturity (WAM) was maintained at a 35-day range with fund liquidity requirements, both overnight and weekly, being well in excess of minimum requirements at all times. Fund liquidity was covered with a combination of government and supranational holdings, gilt repo, and bank deposits. The fund credit rating exceeded requirements at all times.