The Bank of England is expected to remain cautious and keep interest rates on hold. (Reuters/Reuters)
The Bank of England (BoE) is set to keep interest rates on hold for a fifth consecutive session, despite new data pointing to slowing inflation.
The consensus among traders is that the Bank of England’s Monetary Policy Committee (MPC) will keep interest rates unchanged at 5.25% when it announces its latest decision on Thursday.
Britain’s inflation rate slowed to 3.4% in February, down from 4% in January and the lowest since September 2021, according to figures from the Office for National Statistics (ONS).
This is the lowest inflation rate since September 2021.
BoE plans to follow ECB and Fed
But the data is not expected to prompt Threadneedle Street to cut borrowing costs from 16-year highs as central banks around the world remain cautious.
The European Central Bank (ECB) kept interest rates unchanged this month, and the US Federal Reserve (Fed) is due to do the same on Wednesday.
Nomura said central banks may be suffering from “preemptive fear” as the ECB and Bank of England remain cautious until the US Federal Reserve cuts interest rates, but both insist they can cut rates independently of the Fed.
Read more: UK inflation falls to two-year low of 3.4%
“Market prices for the ECB, and to a lesser extent the Bank of England, have been primarily driven by Fed interest rate expectations. While market participants believe other central banks are ‘afraid to make the first move’, we believe the US and European macroeconomic cycles are diverging, which would justify the ECB and Bank of England cutting interest rates on their own, independent of the Fed,” the bank’s analysts said.
Is UK inflation falling?
After the last Monetary Policy Committee meeting, Bank of England Governor Andrew Bailey said that while there had been “good news” about inflation in recent months, the Monetary Policy Committee needed to see further evidence that inflation “has fallen to 2 per cent and is staying there” before cutting interest rates.
“If we believe the most trusted economic forecasts, inflation appears to be trending down, but it currently remains at twice the Bank of England’s 2% target and has not come down decisively since November last year,” said Laith Khalaf, head of investment analysis at AJ Bell.
“Combined with inflation-busting wage growth and low unemployment, there is no incentive to cut rates at the moment,” he added.
Excluding bonuses, annual wage growth slowed to 6.1% in the three months to January from 6.2% previously, while the unemployment rate rose to 3.9% from 3.8%, reversing a decline in the fourth quarter of 2023.
Paul Dales, chief UK economist at Capital Economics, said that with consumer prices at 3.4 percent, “the Bank of England is unlikely to become more dovish even if it leaves rates unchanged at 5.25 percent tomorrow.”
The story continues
But he added: “We now expect CPI inflation to crash to 1.7% in April (the Bank of England sees it at 1.9%). More surprisingly, the Bank thinks it will recover to 2.7% by August, while we think it will fall to closer to 1%.”
Read more: When will interest rates fall and what should you do?
“From April, UK CPI inflation will be significantly below US and eurozone inflation.”
“This could lead the Bank of England to start cutting interest rates in the summer (probably June) and, with inflation at 1%, it may be forced to cut rates to 3% next year rather than the 4% that investors are expecting.”
“Given the slowing economic growth, weakening inflation and weak wages data, we think an 8-1 vote is looking more likely,” said Sanjay Raja, chief UK economist at Deutsche Bank. The MPC’s outside members [Swati] Dhingra voted in favor of the rate cut.
“For now, we remain firm in our view that the first rate cut will occur in May, but our confidence is diminishing, especially with little signal from the MPC on when rate cuts will start,” he added.
ICAEW’s economics director Suren Till also believes rates will remain unchanged on Thursday but believes falling inflation points the way to a rate cut in the summer.
Read more: Winners and losers of the new tax year
“The Bank of England’s forecast for inflation to start picking up later this year is overly pessimistic, with the impact of previous interest rate increases being delayed and economic weakness likely to keep price pressures down through the year,” he said.
“Rates will remain on hold on Thursday, but these figures could influence a more dovish vote distribution and meeting minutes as policymakers prepare for a summer rate cut,” he added.
What to expect on Thursday
Financial markets are pricing in just a 3% chance of a rate cut this week, with traders widely expecting the first cuts to come in the summer, in June or August.
“We expect the committee will be inclined to wait until their August meeting to cut rates, at which point a new outlook will be provided,” said James Smith, developed markets economist at ING.
“We believe banks will be a little more accommodative this year than investors expect, which is what the market is currently pricing in, and we expect a total of four 25bp rate cuts in 2024,” he added.
Read more: 7 actions to take before your tax-free allowance resets
Steve Matthews, investment director at Canada Life Asset Management, said “all eyes” will be on the votes of Catherine Mann and Jonathan Haskell this week.
Messrs. Mann and Haskell opted to raise the rate to 5.5 percent, while fellow outside committee member Dhingra called for an immediate cut. The majority voted for no change.
“If Haskell and Mann keep their rates on hold it would suggest a rate cut in June may be on the table, but it would still retain the concerns Mann repeated last week about the tight labour market and the fact that UK wage growth is still outpacing inflation despite slowing again in the three months to January. Disappointing US inflation data released last week will also be kept in mind,” Matthews said.
“Meanwhile, markets will also be watching to see whether more committee members join Swati Dhingra, who was the first to call for an immediate rate cut last month. We expect Dhingra to remain the outlier unless there is something dramatic changing in Wednesday’s inflation data. Most of the committee would like to see the data get very close to 2 percent and stabilize around there before joining in on the rate cut,” he added.
The Bank of England’s Monetary Policy Committee will announce its interest rate decision at midday on Thursday.
Take a look: Which items in your shopping basket contribute to inflation?
Download the Yahoo Finance app, available for Apple and Android.