People walk in front of the Bank of England in the financial district of the City of London in London, United Kingdom on January 26, 2023.
Henry Nicholls | Reuters
LONDON – The Bank of England is widely expected to keep interest rates steady at 5.25% on Thursday, but market watchers will be closely watching voting behavior, forecasts and language for clues about future rate cuts.
On Wednesday afternoon, the market estimated a greater than 96% chance that the U.K. central bank’s Monetary Policy Committee will leave interest rates unchanged at their current historically high levels, as recent economic data pointed to significant progress on the institution’s three indicators of inflation persistence indicate.
The labor market has shown signs of rebalancing, although overall developments remain somewhat uncertain, while wage growth and services inflation have significantly surprised the bank’s November forecasts, economists at Goldman Sachs noted on Sunday.
“We therefore expect a 9-0-0 vote split with no dissenting votes, but the vote split remains difficult to predict given the limited recent comments from MPC members,” said Goldman economist Ibrahim Quadri, suggesting the three dissenting votes for further rate hikes in December Meeting is brought into harmony.
“In the case of dissent, we think of moderate dissent in the form of [Swati] Dhingra votes for a 25 basis point cut and/or a restrictive dissent in the form of [Catherine] It is possible that Mann will vote for a 25 basis point hike, but we believe hawkish disagreements are less likely given the moderation in underlying service sector inflation since the last MPC meeting.”
The annual rate of the consumer price index for services was 6.4% in December, up slightly from 6.3% in November but down from 6.9% in September, according to the latest data filed with the MPC to prepare its November forecasts.
Headline UK inflation rose unexpectedly to an annual 4% in December due to a rise in alcohol and tobacco prices, while the closely watched core CPI reading was unchanged at 5.1%.
Even though the UK economy has been sluggish, it has exceeded expectations and so far averted a technical recession, although GDP stagnated in the third quarter of 2023 and many economists still see a recession ahead.
Updated forecasts
Quadri says Thursday’s updated forecasts are likely to show a significant upward revision to the bank’s growth forecast and a reduction in its near-term inflation forecast, although this could be revised upwards towards the end of the forecast horizon due to the lower conditioning rate.
“We expect the MPC to maintain its data-dependent approach and reiterate that monetary policy ‘must be sufficiently restrictive for a sufficiently long period of time,'” Quadri said.
“But we believe the MPC can moderate its tightening bias and soften its policy language somewhat by no longer stating that ‘further monetary policy tightening would be required if there were evidence of more persistent inflationary pressures’.”
Goldman expects an initial cut of 25 basis points in May, followed by further quarter-point hikes at each meeting until the key rate hits 3% in May 2025.
Allan Monks, an economist at JPMorgan UK, also expects the MPC to hint at possible monetary easing over the summer, but does not believe this will happen before August.
“The BoE will not close the door on a possible rate cut in May, but we expect it will not want to fuel expectations of easing so early either,” he said in a research note last week.
“The BoE’s updated narrative is likely to be that clear progress is being made on inflation, but it is still too early to declare a victory and therefore caution is warranted when considering when and how quickly policy can be normalized.”
JPMorgan also assumes that there will be no more votes for further interest rate increases, so the MPC unanimously agreed on Thursday in its decision to maintain interest rates. The bench did not rule out the possibility of Dhingra voting for a 25 basis point cut at this meeting.
“While the MPC’s vote does not provide formal guidance, some degree of weight is often given to its change from one meeting to the next,” Monks said.
“However, if there is moderate dissent, this should not necessarily be viewed as a reliable indication of where the rest of the committee stands and therefore the likelihood of an earlier cut.”
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2024-01-31 15:25:31
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