The Bank of England (BoE) is poised to maintain its policy rate for the sixth consecutive meeting as it convenes on Thursday amidst lingering disinflationary pressures in the UK economy and recalibrations in investor expectations regarding interest rate adjustments.
The anticipated decision to keep the benchmark interest rate at 5.25% following the policy meeting at 11:00 GMT is accompanied by the release of the Monetary Policy Minutes and the Monetary Policy Report, followed by a press conference led by Governor Andrew Bailey.
Initially trailing behind counterparts such as the Federal Reserve (Fed) and the European Central Bank (ECB) in implementing easing measures, the Bank of England now appears inclined to initiate interest rate reductions sooner than previously anticipated, prompted by mounting disinflationary forces.
Market sentiment suggests widespread anticipation of a potential interest rate cut by the Bank of England, possibly in August or September, with an estimated 70% likelihood of a subsequent decrease in December.
In March, the UK witnessed an acceleration in disinflationary trends, with the headline Consumer Price Index (CPI) registering a 3.2% increase (down from 3.4%), and the core CPI, excluding food and energy costs, rising by 4.2% (down from 4.5%).
The latest inflation data challenges the Bank of England’s narrative of “higher for longer,” with expectations leaning towards the central bank maintaining its cautious stance.
Governor Andrew Bailey, speaking at a recent event held by the Institute of International Finance, hinted at forthcoming inflation figures indicating a significant decrease, along with suggestions of a loosening labor market.
Recent findings from the Bank of England’s Decision Maker Panel survey (DMP) conducted between March 8 and 22 revealed a decline in one-year ahead CPI inflation expectations to 3.2% from 3.3% in February, and a similar decrease in three-year-ahead CPI inflation expectations to 2.7% over the three-month period leading to March. Additionally, expected year-ahead wage growth dipped to 4.9% based on a three-month moving average, prompting firms to anticipate a 1.5 percentage point decrease in their wage growth over the next 12 months.
At the Bank of England’s March 21 gathering, Governor Andrew Bailey acknowledged market expectations of interest rate reductions, expressing optimism about inflation trajectory and hinting at the possibility of two or three rate cuts this year.
Analysts at TD Securities foresee the Bank of England maintaining its stance in the May meeting, citing sticky wage and inflation data, with a marginal risk of another dovish dissenter joining the voting panel. Similarly, strategists at Danske Bank expect the central bank to keep the rate unchanged, while softening its communication to prepare markets for an impending cutting cycle, with the first 25 bps cut anticipated in June.
As the Bank of England’s interest rate decision looms, GBP/USD is expected to maintain its current range despite lower inflation trends in March. FXStreet Senior Analyst Pablo Piovano suggests that a clear breach of the critical 200-day Simple Moving Average (SMA) at 1.2545 could pave the way for further gains, while a resurgence of selling bias could prompt corrective moves with immediate support seen at the 2024 bottom of 1.2299.
In conclusion, the Bank of England’s decision on interest rates is likely to influence market sentiment and impact currency dynamics, with investors closely monitoring the central bank’s stance amidst ongoing economic uncertainties.
