Some personal reflections on today’s news (as usual, all views here are my own only).

First, the economics.

The fall in UK inflation from 3.2% to 2.3% in April was slightly smaller than expected, but still another big step in the right direction.

Admittedly, the ‘core’ rate excluding food and energy, at 3.9%, was still nearly twice the MPC’s 2% target for headline inflation. Services inflation remained high, at 5.9%.

Nonetheless, this should not prevent the Bank of England from cutting rates in the summer. April was always going to be a tricky month as wages and other costs which are indexed to inflation caught up with the previous increases in the CPI and RPI.

The unusually large hike in the National Living Wage took effect last month too. The strong price pressures in services partly reflect above-inflation increases for the relatively low-paid, which is a helpful shift in relative prices at a time of labour shortages.

Crucially, though, these are lagging indicators, whereas policy should be forward looking. Monetary growth has now settled at rates consistent with low and stable inflation, and there are plenty of signs that the labour market is cooling. Energy and food inflation also have further to fall.

The upshot is that the April inflation data alone should not rule out a first interest rate cut in June. The MPC will then have another set of inflation and labour data and more evidence on the latest pay settlements. If not June (I comment on the impact of the election timing below), then rates should be cut in August.

Next, the politics. Rishi Sunak’s decision to go for 4^th July was ballsy, but I get it.

The obvious call was to wait until the Autumn, when the economy should be stronger, inflation lower for longer, and interest rates coming down, with one more ‘fiscal event’ in the bag. (Like many others, I had pencilled in 14^th November as the most likely date for the general election.)

Viewed negatively, the decision to go sooner could reflect fears that the Bank won’t now deliver all the rate cuts already priced into the mortgage market, or that the OBR won’t give the green light for more tax cuts. (Today’s data on the public finances in April were also slightly worse than expected, but this was only first month of the new fiscal year.)

Donor fatigue and fear of more defections might have been factors too. The early election call could therefore be seen as a sign of weakness.

But more positively, Sunak can run with the narrative that he has an economic plan which is now starting to work, before Labour’s Keir Starmer has enough time to develop his own. He will presumably lead on this own track record, especially as Chancellor during Covid (it feels an age ago, but he was popular at the time, at least until inflation took off and the bills had to be paid), rather than the full 14 years of Conservative government.

In the meantime, business and consumer confidence has clearly turned the corner, notably the outlook for personal finances. It is harder for Labour to argue that ‘things can only get better’ when they are already improving under the Conservatives.

Sunak might also gain some brownie points for ending the uncertainty about the election timing, for giving the public the say they clearly want, and for taking the fight to the Opposition. The last point should at least unite the Conservative Party again.

The imminent election obviously complicates the Bank’s interest rate decision in June (the announcement is on the 20^th). The MPC might want to hold off until after the election, simply to take account of the new government’s economic plans and any market volatility.

However, the Bank could still cut rates in June if (obviously a big ‘if’) this is clearly justified by the new inflation and labour market data released between now and then. The MPC might be wary of appearing to be influenced by the political cycle, but surely this works both ways? Delaying a rate cut despite favourable data might be seen to be helping Labour!

This January article from the i newspaper quoted two ex-MPC members (Michael Saunders and Charles Goodhart) who agreed that the Bank would be reluctant to act during an election campaign. They didn’t rule out a move either, especially if this is consistent with what the markets are expecting at the time. But if the markets are still assigning a very low probability to a June cut – as they now seem to be – it will that much harder for the MPC to surprise.

Overall, the PM will hope he is starting the campaign on the front foot, even if he is still way behind in the polls. The ‘drowned rat’ look of the statement in Downing Street was unhelpful. But a week, as the old adage goes, is a long time in politics. Now Rishi Sunak has six of them to turn the voters around.

Needless to say, I’ll comment further on the main parties’ plans as they emerge. But first, it’s been a long day, so I’m off down the pub…

• Applied economics
• Everyday Economics
• financial markets
• Fiscal Policy
• Monetary policy
• Politics
• Taxation
• UK economy