On May 7, 2024, London, England, variegated tulips were planted in the flower bed opposite the Bank of England in the City of London. =
Mike Camp | In Pictures | Getty Images
LONDON – The Bank of England will keep interest rates steady at its meeting on Thursday, with traders expected to pore over the details of Governor Andrew Bailey’s statement as expectations grow for a potential rate cut over the summer.
The Bank of England’s Monetary Policy Committee is widely expected to keep bank interest rates at 5.25% and make an announcement at noon.
The committee will assess data including UK inflation, which stood at 3.2% in March, slightly above consensus forecasts and still some way off the Bank of England’s 2% target. Core inflation, which excludes energy, food, alcohol and tobacco, was 4.2%, while services inflation, a key indicator for policymakers, was 6%.
Still, Bailey has emphasized in recent weeks that he sees strong evidence that inflation is falling as financial conditions tighten.
At the same time, due to the sharp year-on-year decline in energy prices, the overall price increase in April is expected to decline significantly, with some forecasts dropping it to less than 2%.
Based on money market pricing, traders appear uncertain about a June rate cut, with the odds about 50-50. At the same time, bets on the first interest rate cut in August have increased, with the possibility of a 25 basis point rate cut about 80%, and a total rate cut of 50 basis points this year.
Francesco Garzarelli, head of research at Eisler Capital, said investors will be watching the votes of the nine voting members of the Monetary Policy Committee on Thursday for clues about the June meeting.
At the most recent meeting in March, eight votes were cast in favor of keeping interest rates steady and one in favor of a rate cut.
“There’s more to the communication. Pele’s comments and the outlook are important,” Gazzarelli said Thursday on CNBC’s “Squawk Box Europe.”
“There is also an optics factor here, the inflation in the headline data will fall rapidly. It will hit the target very quickly, which will put a lot of pressure on the central bank to start normalizing policy.”
European divisions
“We’ve started to see a divergence between US policy and UK and European policy over the last few months and I think the UK will definitely see cuts later this year,” said Emma Wall, director of investment research and investment research. Analysis from Hargreaves Lansdown told CNBC’s “Signpost Europe” on Wednesday.
Due to the recent acceleration of inflation, Federal Reserve monetary policymakers have firmly postponed market interest rate cut expectations to September at the earliest. Some economists believe the Fed may not cut interest rates at all this year.
This has led ECB presidents to emphasize that they will chart their own course rather than wait for cues from the Fed. The Swiss National Bank unexpectedly announced an interest rate cut in March, and the Riksbank also cut interest rates as expected on Wednesday.
Officials at the European Central Bank, which sets monetary policy for the 20 euro zone countries, have sent a strong signal that they will cut interest rates in June unless there is a major shock.
Hargreaves Lansdown’s Wall expects the Bank of England to cut interest rates in June and only once more this year. She said much depends on the state of the UK economy, which is proving to be much stronger despite a recent slowdown in the US economy and consumer health.
Wall pointed out that the Organization for Economic Cooperation and Development this week downgraded the UK’s economic growth rating in 2024. The organization also predicts that the UK will become a laggard among the G7 economies next year.
The UK entered a shallow recession in the second half of 2023, but recent data points to modest growth in early 2024.
But research firm Capital Economics said the market was too cautious in pricing interest rate cuts. Inflation is expected to fall below 2% in April and to 0.5% later this year, reversing pressure on the Bank of England to address excessively low inflation.
As a result, they expect the Monetary Policy Committee (MPC) to cut interest rates in June, taking rates to 3% next year, while the market is pricing in 4%.
