BoE cavalry will arrive too late for Rishi Sunak

Rishi business. It’s Dishy Rishi versus the Big Sexy Turtle. After a big loss in local polls, UK Prime Minister Rishi Sunak could really use an economic rebound to pull off an improbable comeback in this year’s elections. Bank of England Governor Andrew Bailey, who was likened to an alluring turtle by his predecessor Mark Carney for his cautious decisions, would like a slowdown in inflation so he can cut rates. By the time he does that, it could be too late for the PM.Sunak is clearly in trouble. After last week’s disastrous local elections, his Conservative Party trails the opposition Labour Party by 20 percentage points in the polls. With a national election likely to take place in November, time is running out.One of his biggest problems is that the country is not growing fast enough for his citizens to feel good about the government. UK GDP will expand by just 0.4% this year, according to the Organisation for Economic Co-operation and Development, the slowest rate in the G7 apart from Germany. In 2025, Britain will be the world’s worst-performing advanced economy with growth of just 1%, the OECD reckons.That’s still too fast for Bailey. Strong growth in wages and the prices of services, which are both increasing at an annual rate of 6%, make it hard for the BoE to cut rates. Indeed, the central bank’s monetary policy committee is almost certain to keep borrowing costs at a 16-year high of 5.25% on Thursday. High rates crimp consumption, which the OECD expects to rise by just 0.7% in 2024, and put a dampener on the housing market – UK house prices rose by 0.1% on a monthly basis in April, after dropping 0.9% in March, according to an index compiled by Halifax. Those are two key ingredients of any political “goodwill factor”.The BoE is independent and its main job is to get inflation down to 2%, but Bailey may offer some succour to Sunak soon. The central bank expects inflation to fall from the current 3.2% to just above 2% in the next three months. That’s leading traders to bet the BoE could lower borrowing costs as early as August and then again in November, according to derivatives prices collected by LSEG.Unfortunately for Sunak and the Conservatives, interest rate movements tend to affect the real economy at a Big Sexy Turtle-like pace: there’s usually a lag of between 12 and 18 months. If Sunak opts to brave the polls late this year, a rate cut in August would still be a nice-to-have from a sentiment perspective. But the embattled UK leader isn’t even guaranteed that.

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BoE cavalry will arrive too late for Rishi Sunak

Bank of England Governor Andrew Bailey, who was likened to an alluring turtle by his predecessor Mark Carney for his cautious decisions.

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