- Anticipated Bank of England rate cut pushed back amid inflation
- Global economic growth and inflationary pressures lessen rate cut expectations
- Analysts suggest BoE might delay rate cut until later
Expectations regarding an imminent reduction in the base rate of the Bank of England are diminishing due to the resurgence of inflationary pressures and enhanced global economic growth.
As a result of the Monetary Policy Committee’s unexpectedly dovish vote in March, markets had been placing a greater emphasis on the first base rate reduction by the Bank of England (BoE) occurring in June. However, more recent data has caused expectations to be pushed back to later in the year.
As of the end of the year, the current base rate of 5.25 per cent will not decline below 4.75 per cent, as the scale of anticipated cuts in 2024 is less than 50 basis points. This is consistent with current market pricing, which indicates that the first BoE cut will not occur until August.
Greater than anticipated The release of US Consumer Price Inflation figures on Wednesday followed the release of eurozone PMIs indicating that growth has resumed in all main UK sectors for the first time in nearly two years.
All of this indicates that the BoE will not be in a haste to reduce interest rates, as it would be unwise to risk another rise in price growth in an attempt to stimulate the economy.
Gordon Simon French, chief of research at Panmure and an economist, stated on Thursday that his firm’s initial decision to reschedule its first BoE rate cut from August to June “becomes more and more apparent to be a mistake.”
“We should have had more backbone,” he continued.
“The balance of risks is shifting rapidly for central banks as a result of the recent upswing in economic momentum across all major geographies and the recovery in core price growth,” said the source. “This is led by the Federal Reserve, which is confronted with ineffective US fiscal policy and a positive wealth effect from a robustly performing equity market.”
In light of the Bank of England’s contrasting domestic environment, there exists a limited policy and rhetorical trajectory that may result in a reduction of domestic interest rates over the next few months.
The French investment bank maintains its belief that the BoE will reduce the base rate by 50 basis points to 4.75 per cent this year, “but the timing is extremely uncertain.”
He further stated, “Two crucial decisions will be necessary: to what extent can the United Kingdom ease policy without abandoning its restrictive stance?” What would be the extent of the crystallisation of imported price pressure if the BoE were to reduce rates at a quicker pace than the Federal Reserve?
Although the Federal Reserve has a history of setting global interest rates first, some analysts now believe that the European Central Bank might be the first to follow suit.
French’s remarks echo those of Megan Greene, a policymaker at the Bank of England, who cautioned on Thursday that rate decreases in the United Kingdom are “far off” due to persistent inflationary pressures.
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“Markets now anticipate the BoE will reduce interest rates earlier and by a greater amount than the Federal Reserve this year,” she wrote in the Financial Times.
Inflation dynamics and macroeconomic fundamentals differ between the United Kingdom and the United States, with the former posing a greater risk of persistence. Rate cut wagers are being moved in the incorrect direction by the markets.
“A lower potential growth rate in the United Kingdom results in increased inflationary pressures, all else being equal.” All else, however, is not equal. Similarly, demand in the United Kingdom is considerably more constrained.
“A very tight labour market and energy price shocks have delivered a double whammy” to the economy of the United Kingdom. Persistency inflation therefore poses a greater hazard to it than to the United States. However, interest rate market pricing does not reflect this.
