City of London skyline on 6th March 2024 in London, United Kingdom.
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LONDON — The Bank of England on Thursday held interest rates as expected and said restrictive monetary policy was taming inflation, but warned a June rate cut was not a done deal.
Members of the central bank’s Monetary Policy Committee voted 7-2 to maintain rates at their current levels, with the latter favoring a cut. In its prior meeting, only one member voted to reduce rates.
The decision keeps the BOE’s key Bank Rate at 5.25%.
The MPC nonetheless cautioned that indicators of inflation persistence “remain elevated,” highlighting that services inflation came in at 6% in March. It added that geopolitical issues were adding “upside risks” to the near-term price outlook.
In a new addition to its monetary policy statement, the bank said it would “consider forthcoming data releases and how these inform the assessment that the risks from inflation persistence are receding.” Two consumer price index prints and two sets of wage growth data are due before the central bank’s next meeting on June 20.
BOE Governor Andrew Bailey said the latest figures were “encouraging, but we are not yet at a point where we can cut Bank Rates.”
June or August?
Anticipation has been building for the BOE to begin interest rate cuts in the summer, with money markets pricing in a 25 basis point reduction in August and 50 basis points in cuts overall this year.
Some economists have nonetheless forecast a cut as soon as June, with market pricing continuing to give this around a 45% probability after the latest announcement.
U.K. headline inflation is forecast to drop dramatically in April due to lower energy prices, from the current 3.2% to below the BOE’s 2% target, according to some projections.
In its Thursday release, the BOE said it expected headline inflation close to 2% in the near-term, and expects it to increase slightly later in the year as the drag from the energy market wanes.
It meanwhile sees U.K. gross domestic product growing by 0.4% in the first quarter of the year, and by 0.2% in the second quarter. The economy fell into a shallow recession in the second half of 2023.
In a press conference following the announcement, Bailey emphasized the importance of monitoring data releases.
“June is not a fait accompli, but each meeting is a new decision,” he said.
While the BOE is politically independent, its decisions are playing out ahead of a U.K. general election. The ruling Conservative Party — which is trailing in the polls — will be seeking to show its economic credibility and speculation is rife as to when Prime Minister Rishi Sunak will call the election, which is expected in the second half of this year.
European divergence
The cautious messaging differs somewhat from that of the European Central Bank, where monetary policymakers have firmly guided for a June rate cut barring a major inflationary shock.
The National Bank of Switzerland and Sweden’s Riksbank, meanwhile, have already cut rates, putting Europe’s central banks on a swifter timeline than the U.S. Federal Reserve, which is expected to hold for longer. The total number of cuts from each central bank this year remains open to debate.
The BOE’s Bailey also told reporters on Thursday that U.K. inflation dynamics were “different to the U.S.,” which had led to some decoupling of rate expectations. U.S. inflation rose more than expected in March, to 3.5%.
Paul Dales, chief U.K. economist at Capital Economics, noted that the BOE on Thursday repeated previous messaging on monetary policy remaining restrictive for “sufficiently long” and for “an extended period.”
This “suggests to us that the Bank is not implying it will cut rates at the next policy meeting in June,” he said in a note.
“But the new line that the MPC will ‘consider forthcoming data releases and how these inform the assessment that the risks from inflation persistence are receding’ implies that the MPC is willing to change its stance and that the data will determine when that happens.”
Wage data may end up informing whether the cut falls in June or August, he added.
The BOE is “setting the stage for a summer rate cut,” even if June or August remains up in the air, Hussain Mehdi, HSBC Asset Management’s direct of investment strategy, said in emailed comments.
“Either way, European rate cuts are coming and we think they are likely to be delivered ahead of the Fed which remains hamstrung by stickier inflation. European monetary policy easing and signs of a cyclical rebound supports the outlook for the region’s equity markets, which have performed well this year and remain attractively valued,” Mehdi said.
