The Bank of England will keep rates unchanged at 5.25% on Thursday, for the fifth consecutive meeting. We may get another rare vote split with multiple different opinions on interest rates. But the MPC is expected to repeat that it is still too early to think about policy easing, as rates need to stay high enough for a prolonged period of time. More evidence is needed that disinflation is on track before the bank pulls the trigger on rate cuts.
At the previous meeting, the MPC was split three ways between a hike, a cut and keeping rates unchanged. This could happen again with one official voting for a rate rise (Mann or Haskel), Dhingra again voting for a reduction and the six other officials standing pat. The nine-strong committee is not often so divided and at least one hawk may still signal they want to see more data showing cooling inflationary persistence to be comfortable with abandoning their hike bias.
Data (gradually) continues to encourage
Since the last meeting, the latest CPI data released earlier today showed falling inflation, which is only set to decline much further in the months ahead. This is due to declining food and core goods prices, as well as the 12% cut in household energy bills which happens in a few weeks. This potentially means we get 2% headline CPI prints in April and May. However, services inflation is still sticky, even though it matched the BoE’ own forecast and could stay high if consumption rebounds this year due to tax cuts and that fading headline inflation. Meanwhile, recent wage growth is cooler, but again remains elevated.
Other economic data are relatively positive, with January GDP hinting that the shallow second half recession from last year is a thing of the past. Forward looking figures like PMIs are also encouraging amid hopes the economy has turned the corner. The composite is forecast to tick up again when new figures are released tomorrow before the Bank of England meeting.
MPC Speak
Changes to the statement and forward guidance may be limited with the bank maintaining that rates need to “remain restrictive for sufficiently long” and “for an extended period”. This came after the BoE dropped its “further tightening” stance in February. Allied to that, Governor Bailey recently stated that policymakers don’t need inflation to come back to target before the MPC cut rates.
Market reaction
Money markets currently price in around 60bp of easing in total for this year. The first rate cut is fully priced to take place in August. Any dovish hints in the tone or language of the statement, potentially due to the softer inflation prints seen and to come, will be seized upon by markets. This would spark more GBP selling, which remains the best performing major currency versus the dollar so far in 2024.