• Bank Rate held at 3.75% in June with two MPC members voting for a rise.
• UK economy contracts in April following a strong first quarter.
• Mortgage market activity slows as ongoing Middle East conflict weighs on consumer confidence.
• Household savings growth falls compared with last year as competition for retail deposits remains intense.

1. The impact from the conflict in the Middle East is now becoming visible in official growth figures. UK GDP contracted by 0.1% in April following monthly growth of 0.3% in March and 0.4% in February. The contraction in April was driven by a fall in activity in the services sector, where output fell 0.2% on the month as companies started to experience reduced turnover due to higher energy prices affecting consumer spending. Despite relatively strong growth of 0.6% in the first quarter of the year, the economy is likely to struggle over the remainder of the year.
2. Weak growth, together with a softening labour market and a fall in underlying price pressures as oil prices head back to their pre-conflict level, suggests a rise in Bank Rate may be avoided. However, there is a clear risk to the upside on inflation. The headline annual CPI rate remained elevated above the Bank’s 2.0% target 2.8% in May, unchanged from April. The largest upward contribution to prices was from transport, reflecting higher fuel prices, although this was offset by a fall in food and drink prices. The closely watched annual CPI services rate also increased to 3.7% in May from 3.2% April.
3. The situation in the Middle East remains unpredictable, and policy could change swiftly if higher fuel prices are deemed to be causing persistence in above target inflation. The latest MPC minutes show two of the nine committee members voted for a rate rise in June. For these two members the risk of persistent second-round effects was significant and would materialise as firms and households seek to defend their margins and standards of living in the face of higher food and energy prices, respectively.
4. The latest market data also shows a drop in expectations for Bank Rate. The OIS curve implies a 25-basis point rise in Bank Rate over the next 12 months, reflecting the tail risk from the Middle East conflict, but this is down from a 50-basis point rise a month ago.

5. The picture in the labour market was mixed in April. The headline unemployment rate was 4.9% in the three months to April, down from 5.2% in the previous three months. Furthermore, average regular earnings growth held steady at 3.4% in the three months to April, unchanged from March. When adjusted for inflation, pay growth was just 0.3%. However, the job market showed continued softening with vacancies falling by a further 2.6% to 707,000 in the three months to May. This is also the lowest level since April 2021.

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