UK Interest Rate Increase and Bank of England’s Monetary Policy Report: At its meeting this week, the Bank of England’s Monetary Policy Committee (MPC) voted by a majority of 6-3 to maintain the Bank Rate at 5.25%. Of the dissenters, two members voted for an increase of 25 basis points (i.e. to 5.5%) and one voted to lower the rate by the same amount (to 5.0%). Despite this split in the vote, the minutes of the MPC meeting do suggest a change in tone with more discussion of lowering rates than increasing them.
Th Bank of England position follows the decision last week by the European Central Bank to keep its rates unchanged and the announcement on Wednesday of this week by the US Federal Reserve to maintain US rates at their current levels.
In their quarterly Monetary Policy Report, the Bank notes that, having fallen more rapidly that they expected at the time of the previous report in November 2023, inflation could get down to the +2% target in the Spring, although it expects a small increase later in the year, mainly for technical and base effect reasons. They also acknowledge the risk of an external shock that could keep inflation higher than the end-of-year forecast of 2¾%.
The Bank’s statement makes it clear that they will keep interest rates high for long enough so that inflation settles at +2%. The economic outlook in the report forecasts that inflation will remain above the +2% target throughout the forecast period of 2 years – effectively to the end of 2025. The Bank’s Governor, Andrew Bailey noted that “we need to see more evidence that inflation is set to fall all the way to the to the 2% target, and stay there, before we can lower interest rates”; in the press conference, he later clarified this to mean “we don’t need to see inflation back at target – we need confidence it’s going there”.
This report includes an update on business conditions by the Bank’s local Agents based on information gathered in the 6 weeks to the middle of January. There are various pointers for the manufacturing sector including the view that large-ticket consumer goods (furniture, white goods, etc.) remains weak due to reduced activity in the housing market and that demand for second-hand cars (and presumably their prices) is falling with the improved availability of new vehicles (although the latter is also easing due to high interest rates).
The Agents’ contacts were not reporting disruption to shipping from the problems in the Red Sea, although it was acknowledged that this could come and may be more related to the timing of the interviews and the report.
Investment intentions softened towards the end of 2023 and look to remain modest going into 2024 and capital spending could fall slightly this year. Contacts frequently cite uncertainty, weakening demand, costs of and access to finance, and recent capital expenditure decisions as reasons to postpone or reduce investment in the coming year. While many mention technology investment over the coming year, it is more focused on software or digital developments than major IT overhauls. Automation and efficiency continue to motivate investment given the recent tightness of the labour market, but this tends to be ongoing from previous plans rather than new or additional investment.
In terms of financing investment, contacts do not often mention interest rates specifically as a major constraint. Rather, it is constrained cash positions and tighter financing conditions including more restrictive covenants that are leading contacts to scrutinise investment plans more closely.
Manufacturing output volumes continued to decline over the past year but more of the Agents’ contacts reported that this had stabilized than in the previous report. High-tech sectors such as aerospace, defence, specialised capital and sustainable equipment seem to be bucking the generally negative trend with activity continuing to pick up. Some contacts added that export demand was supporting activity especially in the US and Asia. Vehicle output improved as supply chain disruption eased and demand was resilient.
You can access the Monetary Policy Report on the Bank of England website at https://www.bankofengland.co.uk/monetary-policy-report/2024/february-2024; by scrolling down to the report section of this page, you can use the side menu to jump to the section on the Agents’ update on business conditions. The minutes of the MPC meeting are published at https://www.bankofengland.co.uk/monetary-policy-summary-and-minutes/2024/february-2024.
UK Automotive Output 2023: The Society of Motor Manufacturers & Traders (SMMT) has published the December figures which, of course, gives us the full year picture of output in 2023.
Production of cars increased by +16.8% compared to the 2022 figure with vehicles for overseas markets growing slightly faster than for home market, resulting in the export ratio edging up to 79%. The total of 905,117 vehicles produced was the highest since 2020. The top producer was Nissan which accounted for 36% of total production, with JLR (26%), Mini (20% and the only one of the majors to see a fall in 2023) and Toyota (14%) accounting for most of the rest of the production.
If the output of commercial vehicles is added, total output of vehicles rose to just over 1 million for the first time since 2019. Production of commercial vehicles rose by +18.5% to 120,357, the highest figure since 2010 and following an increase of +39.3% in 2022. The export ratio for commercial vehicles was 64%.
Probably the most important part of the automotive industry for many members is the production of engines which grew by +7.8% in 2023; however, this was not quite enough to counter the reduction we saw in 2022 so the total of 1,629,570 was just below the 2021 level. The interesting trend here is that the growth came entirely from internal combustion engines for export which increased by +23.9% while those for UK car assembly plants declined by-13.2%; this took the export ratio for engines to 64%, its highest since 2011.
You can get the details from the SMMT website at https://www.smmt.co.uk/vehicle-data/manufacturing/ or request the data file from MTA.