News & analysis

Today’s decision by the Monetary Policy Committee (MPC) to maintain Bank Rate at 5.25% comes as little surprise to markets, with sell-side economists unanimously expecting no change in policy.

Instead, the focus for traders was on any accompanying guidance as to when the Bank could begin easing rates. On this point, we think there are three key things of note. First, the vote split. With Deputy Governor Dave Ramsden joining external member Swati Dhingra to dissent to give a 2-7 majority voting for a cut versus a hold respectively, the MPC’s voting pattern has now shifted in a more dovish direction. Second are the longer term inflation forecasts. These saw a notable downgrade at the two and three year time horizons, presenting a similarly dovish change. That said, we don’t think this represents as much of a dovish shift as initially implied given Ramsden’s speech a fortnight ago effectively telegraphed his dovish view, while economists also broadly expected the BoE to mechanically revise its inflation forecasts lower due to the hawkish change in the underlying SONIA curve. The third, and most significant point of note was the commentary accompanying today’s decision, which in our view skewed slightly more hawkish, at least when considering the short term outlook for Bank Rate. While policymakers noted that the risks to their inflation forecasts were now more balanced, there was a “range of views” about the evidence needed to warrant a change in Bank Rate, suggesting the threshold for a cut in June remains somewhat higher than implied by the vote split and the BoE’s forecasts.

Coupled with repeated reference to the uncertainty around wage developments and the passthrough of pay increases to already high services inflation, we think the Bank remains attune to the upside risks to inflation over the coming quarter. While in isolation this may be a fairly balanced approach, relative to the BoE’s intermeeting commentary, it stands out as notably more hawkish.

While today’s decision leaves the door open to the possibility of a June rate cut, we think the language used by policymakers is more consistent with the BoE holding out until August to cut rates. This would not only allow them time to gather sufficient evidence to judge that inflation persistence is more moderate in its next Monetary Policy Report (MPR), but would also align the commencement of the BoE’s easing cycle with a press conference, presenting policymakers with all available communication channels to guide markets through the start of the easing cycle. Moreover, instead of viewing the BoE’s latest inflation forecasts as supportive of a June cut, we think they are consistent with around 3-4 rate cuts in the second half of this year. This is marginally more dovish than the 2.5 cuts currently priced into the SONIA swap curve for this year and is supportive of our long-held view on the BoE this year.

For sterling, our view that the BoE will delay cutting rates until August’s meeting and cut to a greater degree than markets are pricing thereafter should ultimately prove positive, especially on crosses like GBPEUR.

Over a tactical timeframe, the pricing out of a June rate cut, which currently stands at around 50%, should produce sterling with an uplift, especially as the BoE’s decision to hold contrasts with the ECB’s first cut. Over the medium-term, however, more substantive easing from the BoE should also lift the UK’s growth outlook, improving the investment conditions and capital inflows into the UK to sterling’s benefit. That said, the extent to which this is positive for the pound depends on the timing of the Fed’s first rate cut and the probability of the ECB conducting multiple rate cuts in the second half of the year. Currently, our base case envisages the Fed first cutting in September, with the ECB lowering rates initially in June, and then three more times from September onwards.

Bank pushes back on the markets hawkish view, but to a limited degree

Turning to the details of today’s communications, largely owing to the fact that the average market implied path for Bank Rate used to condition the BoE’s latest forecasts was now 0.7 percentage points above that used for February’s forecasts, the Bank downgraded its 2-year inflation forecast by 0.3 percentage points, showing inflation just below target at 1.9% in 2Q26 should Bank Rate be reduced to 4.79% in 4Q24 and 4.26% in 4Q25. Moreover, the Bank’s latest 3-year inflation forecast shows disinflation persisting thereafter, with headline inflation cooling further to 1.6%. However, with respect to the 3-year forecast, the MPR also noted that this reflected the Committee’s assessment that structural inflation lags have shortened, reducing the degree of overall inflation persistence. This would steer towards the Bank having more confidence that inflation will return to target over the medium term.

While these tweaks suggest the Bank is pivoting in a more dovish direction, guiding markets to a moderately steeper easing path than assumed prior to the publication of the inflation forecasts, the overall impression of the Bank’s communications wasn’t as dovish as the forecast revisions suggest.

Firstly, policymakers stopped short of outrightly endorsing a cut in June, noting instead the uncertainty posed by the effects of the national living wage hike and potential inflation persistence emanating from the services sector, where inflation is still running at 6% YoY. Moreover, Deputy Governor Broadbent highlighted in the press conference that the Bank’s assessment that risks to their inflation forecasts are more balanced was predicated on a tight monetary policy stance to begin with, effectively highlighting the risks associated with premature easing. This was consistent with the meeting minutes, which noted that there was a “range of views about the extent of the evidence that was likely to be needed to warrant a change in Bank Rate, and the degree to which these members anticipated that incremental information in forthcoming data outturns would lead them to update materially their assessment of inflation persistence.”

Translated, there remains some uncertainty across the MPC on when the Bank can begin to trim rates, a point reinforced in the MPR.

As we read it, chief amongst these uncertainties remains the impact of April’s National Living Wage rise, which also notably saw a mention from Governor Bailey in his press conference as well. To this point, the MPR highlighted a number of indicators that have suggested the NLW rise is set to bring a notable uplift in wages over coming months. But, when set against soft demand, this should limit the extent to which firms are able to pass on increases in costs to their prices. This was, however, caveated with an observation that as demand recovers over time, firms might choose to pass through higher wages into services prices more fully. We think this is particularly relevant given the upgrade to the Bank’s own growth forecasts, the likelihood of a strong Q1 data print tomorrow, and our own expectations for growth in the first half of the year to outperform consensus more generally.

On the whole, today’s BoE decision reads as a Bank that is playing for time and optionality, akin to a true data-dependent stance.

We suspect that uncertainty around the data, and the prospects of better than expected demand conditions, should keep the BoE cautious in delivering their first rate cut. While the Bank is set to receive two more sets of labour market and inflation data between now and the June meeting, in our view the bar is still high for these to build sufficient confidence for the MPC to cut rates. We suspect the Committee would likely need to see broad easing across these data prints, based on today’s commentary – an unlikely outcome given the likely volatility in the monthly data. As such, while we would not rule out the possibility that a broad cooling across the data could offer sufficient confidence for the MPC to cut rates in June, we continue to lean in favour of an August start for policy easing.

 

 

Authors: 
Simon Harvey, Head of FX Analysis
Nick Rees, FX Market Analyst

 

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