Goldman: Still Expect BoE Cuts In Q2 On Low Inflation, But Growth And Fiscal Policy Key Tests

Late on Friday Goldman Sachs noted that “UK monthly GDP was a little better than expected, which combined with improvement in recent PMIs suggests an improved outlook for UK growth.”

• “That said, we continue to think that UK CPI will show strong disinflationary convergence to the pattern seen in Europe.”
• “On the back of this, we expect BoE cuts to begin in May and proceed at a 25bp pace each subsequent meeting.”
• “But alongside the improving growth outlook, one possible limit to yield declines will be the potential for fiscal policy to expand both before and after the next UK general election (likely to be held in 2H24).”
• “After the “mini budget” bond sell-off, we expect both parties will be unlikely to promote unfunded spending plans. Additionally, higher interest expense may limit the degree of future fiscal headroom in upcoming OBR assessments.”
• “Our economists also see the possibility that some pre-election tax cuts might already be announced at the Spring Budget in March if fiscal headroom allows.”
• “Both plans could put slight upward pressure on borrowing figures in the coming years, but are likely to remain modest enough that the strong disinflationary pressure we expect to continue into Q2 will be the dominant driver of BoE policy.”