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Bank of England: "BoE is setting the stage for a summer rate cut" say HSBC

May 10, 2024 - Written by John Cameron


Part 2 of our post-Bank of England analysis continues (read part on here)

HSBC Director of Investment Strategy Hussain Mehdi added; "We believe the BoE is setting the stage for a summer rate cut. Disinflation is progressing and the labour market continues to cool. However, the question is, do they go as soon as next month in line with a likely ECB move, or wait until August?”

He expects the Fed to lag; “Either way, European rate cuts are coming and we think they are likely to be delivered ahead of the Fed which remains hamstrung by stickier inflation.”

Quilter Investors strategist Lindsay James was more cautious; “with markets sceptical that the Bank of England can diverge significantly from the script that the Federal Reserve are following without triggering a sharp drop in the value of sterling, and with it a further inflationary pulse. Slow and steady will be the order of the day when the time comes for the Bank of England to start cutting."

Governor Bailey is optimistic that things are moving in the right direction and commented; “We’ve had encouraging news on inflation and we think it will fall close to our 2% target in the next couple of months.”

Bailey added; “We need to see more evidence that inflation will stay low before we can cut interest rates.”

According to the 7 members who voted for no change; “There was also a range of views about the extent of the evidence that was likely to be needed to warrant a change in Bank Rate, and the degree to which these members anticipated that incremental information in forthcoming data outturns would lead them to update materially their assessment of inflation persistence.”

According to the two dissenters; “Bank Rate needed to become less restrictive now to enable a smooth and gradual transition in the policy stance, and to account for lags in transmission. Consumer price inflation was already, and had been for some time, on a firm downward trajectory.”

The two added; “the risks to inflation returning sustainably to the target in the medium term were to the downside.”

There was no specific guidance on the timing of a potential rate cut in the statement, but Bailey was quizzed on the timing in the press conference.

According to Bailey, a June move was neither ruled out or a fait accompli.

On inflation he stated that higher than expected wages and services inflation since February should give the bank pause for thought, but shouldn’t overinterpret.

Bailey also commented; “With the progress we’ve made, to make sure that inflation stays around the 2pc target, that inflation with neither be too high nor too low, it is likely that we will need to cut Bank Rate over the coming quarters, and make monetary policy somewhat less restrictive over the forecast period, possibly more so than currently priced into market rates.”

ING added; “The bottom line: the Bank is inching towards a rate cut but it is keeping its options open. The June vs August debate will be largely resolved when we get those April inflation figures in a couple of weeks' time.”

According to Jamie Dutta, Market analyst at Vantage Markets; "The bank tweaked its inflation forecasts lower, while also changing its statement language by stating that risks regarding inflation persistence were now receding. This change is a big clue that the bank could be intending to cut interest rates next month."

He added; "The beginning of policy easing in June is seeing market pricing shift from two rate cuts currently priced in, to three in 2024. The pound has inevitably fallen on the news. Policy divergence with the Fed is increasing, with the Bank of England now potentially more in tune with the ECB."

Investec Economist Philip Shaw commented; "Our view has been that we will get a rate cut in June, and that's still absolutely feasible. Obviously it will depend on data between now and then but also on whether a sufficient number on the MPC is convinced that inflation persistence is no longer the problem it was."

Daiwa Markets Head of Research Chris Scicluna added; "Normally, such an inflation forecast would have triggered a rate cut, but there are concerns about the labour conditions. By the time we get to June, they will likely have the confidence to pull the trigger on a rate cut. So, they want to see a bit more data."

He added; “Our base line is for a June rate cut."

Rob Wood, chief UK economist at Pantheon Macroeconomics, said the Bank had “moved another half step towards a rate cut”.

He expects a cut in June, but would not be surprised if there was a delay until August.
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