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Monthly Cash Review - GBP State Street GBP Liquidity LVNAV Fund, December 2024

At the Bank of England’s (BoE) Monetary Policy Committee (MPC) meeting on 19 December, the base rate was maintained at 4.75% in line with expectations. The vote was 6-3 with members Dhingra, Ramsden and Taylor voting for rates to be cut to 4.50%. This was a more dovish outcome than the 8-1 vote expected by the market.

Economic Data

  • Headline annual inflation rose from 2.3% in October to 2.6% in November, above BoE expectations of 2.4%, largely driven by base effects in core goods. Core inflation rose from 3.3% to 3.5%, but this was slightly lower than consensus expectations of 3.6%. Services inflation remained at 5.0%, marginally above BoE expectations for a small decline to 4.9%.
  • GDP for October contracted for the second consecutive month at -0.1%, whereas consensus expectations were for growth of 0.2%.
  • GDP for Q3 2024 was revised down from 0.1% to 0.0%. Even though consumer spending grew by 0.5%, this was more than offset by a bigger fall in dwellings investment and net trade.
  • The S&P Global composite purchasing managers’ index (PMI) for December was unchanged at 50.5, slight lower than consensus expectations of 50.7. Readings above 50 are indicative of economic growth. The services PMI remained above the 50-mark at 51.4, with the manufacturing output PMI remaining in contractionary territory at 45.7. The employment PMI fell from 48.9 in November to 45.8 in December.
  • The unemployment rate for October remained at 4.3%, in line with expectations. Private sector regular pay, a focus for the BoE, jumped to 5.4% from an upwardly revised 4.9% (previously 4.8%).

Markets

Economic data released prior to the MPC meeting showed a rebound in headline inflation and stronger-than-expected wage growth. The growth in regular private sector pay growth was higher than the BoE prediction for a rise to 5.1% in its November Monetary Policy Report. This increased concerns about a resurgence in inflation. On the back of this, the market did not expect the MPC to cut interest rates at the December meeting.

Following the MPC meeting, guidance remained unchanged from November. The MPC again stated that “a gradual approach” to rate cuts “remains appropriate” and that policy will “remain restrictive for sufficiently long”. BoE governor Andrew Bailey was also quoted as saying that “a gradual approach to future interest rate cuts remains right”. There was also new wording that the MPC will “assess the extent to which evolving evidence is consistent with more constrained supply, which could sustain inflationary pressures, or with weaker demand, which could lead to the emergence of spare capacity in the economy and push down inflation”. The BoE has also revised down its forecasts for Q4 2024 GDP growth from 0.3% to 0.0%. Those members who voted for an interest rate cut expressed concern that weak activity created a risk of inflation falling too far below the 2% target in the medium term.

GDP for October was the second consecutive month of contraction. The downward revision for Q3 2024 suggests that the economy has been impacted by the drag from higher interest rates, weaker overseas demand and some concerns over the policies in the Budget. The December PMI data also confirms soft activity trends. Businesses attributed this to fragile consumer confidence, tighter corporate budgets, and cutbacks to non-essential spending. Employment indicators continue to weaken. Some firms noted that the planned increases in employer National Insurance Contribution rates announced at the budget had encouraged cutbacks to working hours and longer-term efforts to restructure workforces. Market implied rates (Figure 1) moved higher on the back of this data. The implied rate for February and March 2025 finished the month at 4.54% and 4.50%, implying that there will be one rate cut over the next two BoE meetings.

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

The BoE held the policy rate in December with the minutes confirming a gradual easing in 2025 was the baseline for a majority of MPC members. The yield curve remained volatile as markets reacted to data showing falling employment and strong pay growth underpinning stubborn inflation, potentially keeping borrowing costs high in 2025. Against an inverted yield curve, the investment curve continues to offer yields in excess of 4.75% along the 12-month investment horizon. The fund took advantage of these yields adding duration and maintaining a weighted average maturity (WAM) with a 40-day range, locking in term yield in the highest rated liquid credits. Fund liquidity requirements, both overnight and weekly were 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.

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