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Tuesday, May 21, 2024

Bank of England set to open door for interest rate cuts

The Bank of England is expected to keep interest rates steady at 5.25% on Thursday, and all eyes are on the voting patterns, projections, and language that will give hints about future rate adjustments. Recent economic data suggests that the central bank’s three indicators of inflation persistence have been showing progress, and the market is pricing over a 96% likelihood that rates will remain unchanged.

While the labor market is still somewhat uncertain, there have been signs of rebalancing, and both wage growth and services inflation have fallen below the Bank’s November projections. Goldman Sachs economists predict that there will be a 9-0-0 vote split with no dissents, and it is difficult to predict the vote split given the limited recent commentary by MPC members. Goldman expects a dovish dissent favoring a 25bp cut, or a hawkish dissent favoring a 25bp hike, but it is less likely due to the moderation in underlying services inflation since the last meeting.

In December, the services consumer price index (CPI) annual rate came in at 6.4%, and U.K. headline inflation unexpectedly nudged upwards to an annual 4%. The U.K. economy outperformed expectations and avoided a technical recession, though many economists still predict a recession in the future.

The updated projections are expected to show an upward adjustment to the Bank’s growth forecast and a reduced near-term inflation forecast, with a forecasted rate path trending lower. Goldman sees a 25 basis point cut in May, followed by further quarter-point increments until the Bank rate reaches 3% in May 2025.

Similarly, JPMorgan U.K. Economist Allan Monks anticipates that the MPC will hint at potential monetary policy easing around the summer, but does not believe it will come until August. JPMorgan also expects the votes for further rate increases to disappear, and the MPC may be unanimous in its decision to hold rates on Thursday. The Bank’s updated narrative is expected to emphasize caution in normalizing policy, despite clear progress in managing inflation.

The overall outlook for the Bank of England’s rate decision remains uncertain, and market observers will continue to closely watch the central bank’s actions and communications to gain insights into future rate adjustments. While the economy shows signs of improvement, the road ahead remains uncertain, and the Bank’s decisions will be closely monitored for any potential implications on the U.K.’s economic outlook. With projections and language adjustments expected in the coming months, the implications for U.K. monetary policy remain a key focus for market observers.

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