BOE Rate Cut Expectations Shift as Inflation Remains Elevated

Following the Bank of England’s latest interest rate decision and updated economic forecasts, traders and investors are reevaluating their predictions for when the central bank will reduce interest rates. Previously, many had been waiting for indications that would give them insights into when cuts may commence. The Bank of England’s benchmark rate affects the pricing of various types of loans and mortgages in the UK, rising rapidly in recent years to counteract high inflation. According to LSEG data, markets currently price in a likelihood of approximately 48% for a rate cut in June, surpassing Thursday’s 45% probability. Economists at Swiss bank UBS revised their projections, asserting that the BOE is now anticipated to begin trimming rates in June instead of August. During the BOE’s most recent interest rate decision, the MPC emphasized that a June rate cut was not assured, although two MPC members opted to decrease interest rates, one more than during the previous session. BOE Governor Andrew Bailey stated that while June was not necessarily a certainty, each meeting presents a fresh opportunity to make decisions. UBS attributed the alteration in forecasts to changes in the BOE’s forward guidance, inflation expectations, and remarks made by Bailey concerning the effects of increased national living wages on overall wage growth. The bank now predicts that rates will be reduced in June, August, and November, each time by 25 basis points. The latest U.K. gross domestic product (GDP) data showed that the U.K. economy expanded by more than anticipated in Q1 2024, with a growth rate of 0.6%, surpassing estimates of 0.4%. This development indicates that the U.K. economy has broken free from the technical recession it experienced during the second half of 2023, following two consecutive quarters of decline. Nomura analysts suggested that this outcome implies that inflationary pressures persist and that the economy is more resilient to higher interest rates. The BOE’s warning that indicators of persistent inflation “remain elevated” was affirmed on Thursday, yet they also acknowledged that they anticipate inflation to converge toward the 2% objective in the near future. Analysts at Nomura stated that “this [GDP] release further strengthens our belief that the Bank of England will require a more restrained monetary policy stance than financial markets are currently pricing to subdue inflation.” They predicted that the central bank would wait until August before initiating rate cuts.