(March 21): Two of the Bank of England’s (BOE) most ardent hawks withdrew their support for interest rate hikes, as the UK’s central bank voted for a fifth-straight meeting to keep policy unchanged.
Catherine Mann and Jonathan Haskel joined an 8-1 majority on the Monetary Policy Committee (MPC) to keep rates at a 16-year high of 5.25%, the latest sign that the BOE was edging towards easing policy later this year. The vote represented the first time since September 2021 that no member of the panel had supported an increase.
Still, governor Andrew Bailey cautioned in a statement that the bank was “not yet at the point where we can cut interest rates”. The bank’s guidance that officials would “keep under review” how long rates should be kept at their current level was left unchanged.
The pound fell, and traders ramped up bets for rate cuts this year, fully pricing in three-quarter point reductions for the first time in a month. UK bonds extended gains and the pound fell after the decision. The yield on two-year gilts was down 11 basis points while sterling traded 0.4% weaker at US$1.2738.
Investors anticipate the first BOE rate cut in August but believe there is over a 50% chance of a move in June. The US Federal Reserve’s (Fed) signal on Wednesday night that three cuts are in store in the US this year helped shift the situation in the UK.
Swati Dhingra voted for a second meeting in a row for a quarter-point cut, the bank’s sole voice for loosening policy now. The rest of the committee, including Bailey, supported leaving rates unchanged. Mann and Haskel surprised investors by voting for higher rates just last month, which prompted markets to scale back bets on lower rates over the last few weeks.
“While the MPC voted to keep rates unchanged this month, optimism around GDP coupled with the downward trend for inflation indicates that they could start to cut rates sooner than expected — perhaps as early as May,” said Joe Nellis, economic advisor at MHA.
The minutes said that the MPC recognised that policy could remain restrictive even if rates were cut given they are already in restrictive territory.
The meeting continued the narrative shift by the BOE as it adjusts to the sharp decline in inflation in recent months, with economists predicting that the Consumer Prices Index could soon fall below the bank’s 2% target. Policymakers led by Bailey have repeatedly stated concerns that underlying price pressures, including wages, could push inflation back up if the bank cuts rates too soon.
A reduction in interest rates easing the pressure on household finances may provide the Prime Minister Rishi Sunak’s Conservative government a rare tailwind ahead of a general election expected later this year. The Conservative party’s plunge in the polls has coincided with a period of economic instability with households squeezed by the cost of living crisis and soaring mortgage rates after 14 back-to-back BOE hikes.
“We’re not yet at the point where we can cut interest rates, but things are moving in the right direction,” said Bailey in a statement released alongside the decision. “In recent weeks we’ve seen further encouraging signs that inflation is coming down. We’ve held rates again today [Thursday] at 5.25% because we need to be sure that inflation will fall back to our 2% target and stay there.”
Investors increased bets on rate cuts in the UK before the meeting after the Fed signalled on Wednesday that it is still on track for three reductions to borrowing costs this year despite a recent tick up in inflation. It was then followed by a surprise rate cut at the Swiss National Bank on Thursday morning.
The BOE decision comes after growing evidence of the labour market loosening and price pressures cooling in recent weeks. Data on Wednesday showed inflation stepping down to a 2½ year low of 3.4% in February, with services inflation cooling to 6.1% in line with the BOE’s forecasts. Last week jobs data also showed unemployment rising for the first time since last summer and wage growth edging lower.
Since the BOE’s last meeting, official data has shown the UK suffered a shallow technical recession in the second half of 2023.
Bailey has played down its significance after a pick-up in activity at the start of 2024, though the BOE expects another tepid year of growth. The minutes said the BOE continues to expect a 0.1% rise in GDP in the first quarter of 2024 and another small rise in output in the second quarter.
Chancellor of the Exchequer Jeremy Hunt said in formal exchange of letters with Bailey after the meeting that the policymakers should remain firm. “The plan is working to bring inflation down, but we must not be complacent,” Hunt said.
Source: TheEdge - 22 Mar 2024
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