When might the Bank of England initiate interest rate cuts

The Bank of England (BoE) is expected to acknowledge rapid progress in reducing inflation during its first meeting of 2024. Despite analysts anticipating a hold on interest rates at 5.25%, the central bank’s policy announcement on Thursday will be accompanied by new forecasts, reflecting the projected decline in UK inflation in the coming months.

Inflation Progress and Monetary Policy:
In late 2022, inflation in the UK surged to a 41-year high of 11.1%, posing challenges for the BoE. Despite implementing 14 rate rises from December 2021 to August 2023, pushing the Bank Rate to a 15-year peak of 5.25%, inflation remained elevated at 4.0% in December 2023. The BoE aims to bring inflation down to 2.0%.

Market Expectations and Interest Rate Cuts:
Market expectations suggest a potential shift in BoE policy, with interest rate swaps indicating a 50-50 chance of a quarter-point cut to borrowing costs in May, down from an 80% chance the day before. A Reuters poll indicates a close call on whether the BoE will begin trimming borrowing costs in the next quarter or in July-September, with a slim majority expecting a cut before July as inflation approaches its target.

Economic Outlook and GDP Growth:
The UK’s economic growth has stagnated since the summer, with GDP falling by 0.3% in November. However, the BoE is expected to cut its inflation forecast and upgrade its growth forecast, influenced by lower wholesale gas prices that are anticipated to reduce energy bills.

Central bankers are navigating a delicate balance, weighing the risk of cutting interest rates too soon and potentially reigniting inflation against waiting too long, which could harm the economy and labor market. The BoE’s decision will be closely scrutinized, with attention on whether dovish committee members advocate for immediate reductions in borrowing costs.

The BoE’s upcoming decision reflects a pivotal moment in the central bank’s efforts to manage inflation and support economic growth. As central bankers tread cautiously, global economic conditions and inflationary pressures will continue to shape policy decisions. The upcoming meeting provides insight into the BoE’s strategy in the face of evolving economic dynamics.

Markets are now pricing 56% probability of 25 bps cut at May MPC (vs. <50% probability a week ago). Any hint from BoE MPC that suggests an earlier cut/dovish tilt could send GBP bulls into hibernation. That said, so long the remarks from BoE officials do not sound overly dovish, we reckon the pullback may provide an attractive point for GBP bulls to re-enter.

On the data front, the UK economy has been fairly resilient. Services PMI is still in expansionary territory. Business optimism and consumer confidence were also improving while public sector net borrowing (ex-banking groups) came in much lower than expected. Overall, these positives should continue to support GBP.

Economists at OCBC Bank analyze GBP outlook

Bank of England Governor Emphasizes Inflation Target and Economic Resilience

Bank of England (BoE) Governor Andrew Bailey, in testimony before the UK Treasury Select Committee, highlighted key points regarding the country’s economic outlook and ongoing challenges. Here are the key takeaways from his remarks:

1. Inflation Target Focus:
   • Governor Bailey emphasized the importance of returning the UK to its inflation target. Managing inflation is a priority for the central bank to ensure stability and support economic growth.
2. Household Finances and Mortgages:
   • Bailey reassured that UK households with mortgages are currently not as stretched as they were during the global financial crisis. He indicated that household incomes have seen an increase in recent months, providing a certain level of resilience.
3. Middle East Events and Economic Impact:
   • Acknowledging the tragic events in the Middle East, Bailey stated that, as of now, these events have not had a significant economic impact. However, he emphasized that the central bank is closely monitoring the situation, recognizing the potential for evolving economic implications.
4. Global Economic Context:
   • The Governor’s comments suggest a recognition of the interconnectedness of the global economy. While specific events in the Middle East are being observed, the broader international economic context is likely influencing the BoE’s stance and decision-making.
5. Economic Resilience:
   • Bailey’s remarks underscore the resilience of the UK economy, highlighting positive aspects such as the manageable strain on household finances and the ability of households to weather economic challenges.