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BoE Analysis: Rate Cuts Coming, but Pound Sterling Pares Losses

May 9, 2024 - Written by John Cameron


The Bank of England (BoE) Monetary Policy Committee (MPC) held interest rates at 5.25%, in line with consensus forecasts.

A 7-2 vote and lower inflation forecasts boosted market expectations of a June rate which undermined the Pound, although it recovered from initial lows.

The Pound to Dollar (GBP/USD) exchange rate dipped below 1.2450 before a recovery to near 1.2500 as the dollar lost ground following weaker-than-expected jobless data.

The Pound to Euro (GBP/EUR) exchange rate also recovered to 1.1620 from 2-week lows at 1.1600.

There was an element of short covering as the guidance was mixed.

ING still expects medium-term Pound losses; “Elsewhere in the G10 space, we think sterling is on the verge of independent weakness. We can see EUR/GBP climbing to the 0.87 area later this quarter.” (1.1495 for GBP/EUR).

This was the sixth successive vote to maintain rates at a 16-year high.

The 7-2 vote for the decision resulted from Ramsden joined Dhingra in voting for a 25 basis-point reduction to 5.00%.

Ramsden’s vote was a key element undermining the Pound as yields moved lower.

The FTSE 100 index posted a fresh record high just below 8,400 before hitting profit taking.

Markets moved to price in just over a 50% chance that interest rates would be cut at the June meeting.

According to the BoE, inflation is forecast to decline to 1.9% on a 2-year view and 1.5% on a 3-year view.

Near-term estimates of wages growth were revised higher, but the longer-term forecasts were lowered slightly.

Importantly, the BoE now believes that more of the rise in import costs has now fed through to consumers – meaning external pressures will be weaker.

It also believes “second-round effects” – where inflation leads to higher wages and prices – will fade faster.

GDP growth forecasts were revised slightly higher to 0.5% for 2024 and 1.0% for 2025, although the overall growth outlook is still lacklustre at best.

On the labour market it added; “Based on a broad set of indicators, the MPC judges that the labour market continues to loosen but that it remains relatively tight by historical standards.”

The guidance again stated that “Monetary policy would need to remain restrictive for sufficiently long to return inflation to the 2% target sustainably in the medium term in line with the MPC’s remit.”

It added; “The Committee will consider forthcoming data releases and how these inform the assessment that the risks from inflation persistence are receding.”

According to ING What this statement doesn’t do, however, is come down clearly in favour of a rate cut at the next meeting in June. The key yardstick was whether the Bank changed its forward guidance, and despite that more dovish spin elsewhere, those crucial sentences remained unchanged. The BoE is still telling us that rates need to stay restrictive for an extended period of time.”

The MPC also commented that the increased divergence of demand in the US and Europe could lead to monetary policy divergence with implications for FX.

This implies that it would be no surprise if the BoE cuts rates ahead of the Federal Reserve.

ING commented; “We’re still leaning slightly more towards an August start date for rate cuts, though it’s a close call. What isn’t in doubt, is that the Bank is comfortable with moving ahead of the Fed.”

Read part two.
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