Yahoo Finance Bank of England Weighs When to Cut UK Interest Rates
(Bloomberg) -- Bank of England Governor Andrew Bailey may deliver a lift to British consumers with a stronger signal on when the central bank can lower borrowing costs from their highest in 16 years.
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Economists and markets expect the BOE’s nine-member Monetary Policy Committee to keep the benchmark lending rate at 5.25% on Thursday. A decision is due at 12 p.m. in London and will include forecasts for inflation and growth.
Bailey may provide investors clearer messaging on whether he expects to begin loosening policy at the next meetings in June and August after a dovish shift in tone, though he’s facing a divided committee on when to act.
The governor is also under mounting political pressures in the run-up to a UK general election. Chancellor of the Exchequer Jeremy Hunt has repeatedly raised the possibility of rate reductions, saying they would give voters a “feel-good factor.”
The BOE’s announcement on rates will be followed by a press conference led by Bailey half an hour later. Here’s the key elements of the decision:
Vote Split
While the majority of the nine-member committee is expected to vote for no change in policy, more dovish dissenters may join Swati Dhingra in backing a cut.
A 7-2 split, with most backing unchanged policy, is seen as a possibility after near unanimity at the last meeting. Deputy Governor Dave Ramsden is deemed the most likely to join Dhingra in voting to cut after a dovish tilt in a recent speech.
The meeting minutes are likely to again highlight deep divides among the majority over the timing of a future cut. External rate-setters Catherine Mann, Jonathan Haskel and Megan Greene have all signaled their reluctance to back a quick reduction, citing strong wage growth and services inflation.
Forward Guidance
Dovish comments from Bailey and Ramsden since March’s meeting have stoked speculation that the BOE could begin teeing up a cut in either June or August. Both recently distanced the UK from the resurgent inflation seen in the US and likened its situation to the eurozone, where the European Central Bank is expected to begin loosening policy next month.
In March, the MPC added new language acknowledging that policy may remain restrictive, even if rates were cut.
The BOE could go a step further on Thursday if it wants to prepare markets for a reduction in the key lending rate in June. While some economists have suggested that this could lead the committee to indicate in the guidance that they favor a cut “in the coming months,” others think the MPC will be more cautious in the wording.
“We think if the committee viewed June as a possible meeting for a cut, it would probably need to outline at (Thursday’s) meeting what further evidence it would need to see by June,” said Anna Titareva, an economist at UBS.
Inflation and Growth Forecasts
Another clue to the BOE’s thinking will come with the new inflation forecasts, which are underpinned by the market’s bets on rate cuts.
If the BOE believes that markets are too cautious on the timing and scale of future reductions, it could signal this by showing inflation undershooting its 2% target in years ahead.
The central bank also will likely upgrade its growth forecasts after a stronger start to 2024 than it had expected. Officials had penciled in GDP growth of just 0.1% for the first quarter, but economists believe figures due Friday will show output expanding 0.4%. Business surveys suggest the economy’s momentum continued into the second quarter.
“We expect the BoE’s new forecasts to show slightly better growth and a more encouraging inflation trajectory,” said Ruben Segura-Cayuela, economist at Bank of America.
Markets
A dovish tilt in the BOE’s guidance or forecasts could lead bond traders to increase bets on an earlier cut. Money markets currently see policymakers starting to ease in August and attribute a 40% chance to a reduction in June. There’s a total of two quarter-point cuts priced in for the year.
“Too soon, but getting closer. That is the message that we expect the BOE to send tomorrow,” said Matthew Landon, global market strategist at JPMorgan Private Bank. “The stronger start to the year for the UK economy leaves us in the August camp for the first cut, but we would be surprised to see Bailey shut the door on June altogether.”
Any signs that a cut could come as soon as next month would likely weigh on the pound and boost UK bonds, which have sold off earlier this year as traders pulled back from betting on as many as six rate cuts in 2024. The yield on two-year gilts, among the most sensitive to monetary policy, is trading around 4.3%.
Quantitative Tightening
While a decision on the future of quantitative tightening is not due until September, speculation is mounting that the BOE may stop its asset sales later this year.
The central bank is currently unwinding its balance sheet of government bonds at a pace of £100 billion a year, including a mixture of active sales and allowing debt to mature.
Economists have argued that it could end the active sales later this year, as it begins to cut interest rates. Sanjay Raja, chief UK economist at Deutsche Bank, warned that “the effects of active QT could add to a tightening in financial conditions — working against the bank’s key monetary policy lever.”
--With assistance from Andrew Atkinson and Alice Gledhill.
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