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Bank of England tilts towards rate-cut mode

Published 03/21/2024, 08:23 AM
Updated 03/21/2024, 08:58 AM
© Reuters. Road construction workers carry out work outside the Bank of England in the City of London financial district in London, Britain, February 13, 2024. REUTERS/Isabel Infantes/File Photo
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LONDON (Reuters) -Britain's economy is "moving in the right direction" for the Bank of England to start cutting interest rates, Governor Andrew Bailey said, as two of his colleagues dropped their vote a rate hike.

The BoE's rate-setters voted 8-1 to keep borrowing costs at their 16-year high of 5.25% on Thursday, as the two officials who had previously called for higher rates changed their stance.

Most economists polled by Reuters had expected one member of the Monetary Policy Committee to continue voting for an increase in Bank Rate.

MARKET REACTION:

FOREX: The pound fell against the euro and the dollar. It was last down 0.4% at $1.2734 versus $1.2749 earlier.

BONDS: British government bond yields extended their fall, with rate-sensitive two-year yields down 10 bps at 4.12% compared to 4.14% just before the BoE statement.

Interest-rate futures showed traders are pricing a roughly 70% chance the BoE will cut rates in June.

STOCKS: UK stocks rallied, with the blue-chip FTSE 100 hitting an intra-day high just after the BoE decision. It was last up 1.5% on the day.

COMMENTS:

RUTH GREGORY, DEPUTY CHIEF UK ECONOMIST AT CAPITAL ECONOMICS, LONDON:

"Today’s communications suggest the MPC is gaining confidence that inflation will fall sustainably back to the 2.0% target.

"That said, no-one joined Dhingra in voting for a 25-bp cut to 5.00%. And the MPC largely stuck to its hawkish guns in the policy statement, saying that key indicators of inflation persistence remain elevated and that policy will be “restrictive for sufficient long” and “restrictive for an extended period”.

"We’re not sure this guidance tells us a great deal. It is the data that will decide when rates are cut."

KALLUM PICKERING, SENIOR ECONOMIST, BERENBERG, LONDON:

"Dovish hold: The BoE seems keen to validate market expectations for a summer interest rate cut and is emphasising that monetary policy will remain restrictive for some time, even as policymakers lower the bank rate due to the fact that the current bank rate of 5.25% is above the neutral rate - which is in the 3.5-4.0% range, in my view.

"Policymakers are growing in confidence that they have mostly tamed inflation and now want to take steps to ease the monetary headwind on the economy – reaction function is shifting from taming inflation to supporting growth."

JESSICA HINDS, DIRECTOR IN FITCH RATINGS ECONOMICS TEAM:

"The recent improvements in the inflation and wage data resulted in the last remaining hawks on the MPC capitulating today, with both Catherine Mann and Jonathan Haskel dropping their vote for a further increase in Bank Rate."

"But Governor Bailey signalled that the Bank was not yet on the cusp of cutting interest rates. The minutes also suggested a wide range of views about inflation persistence among the eight members voting for a hold today, with particular concerns about services inflation. We think it will take until August for the majority to join Swati Dhingra in voting for a cut."

ANDREW JONES, PORTFOLIO MANAGER, JANUS HENDERSON, LONDON:

"With inflation for February coming in roughly in line with expectations (core CPI at 4.5% versus 4.6% consensus) yesterday, it is not a surprise to see interest rates being held flat by the MPC today.

"As it seems very likely that inflation will continue to move downwards over the next few months, we would still expect to see interest rate cuts in the middle of the year."

"UK domestic stocks are currently valued very modestly in relation to their history, but as recent trading news from companies such as Wickes, DFS, Marshalls and Travis Perkins (LON:TPK) has shown, demand is currently weak. It is likely though when interest rates are cut, that stocks which are mostly exposed to the UK economy could well start to attract more interest again."

FIONA CINCOTTA, MARKET STRATEGIST, CITY INDEX, LONDON:

"That what’s really caught my eye - the two hikes last meeting have turned more neutral and looking to keep rates on hold."

"Overall that must make for a less hawkish position from the central bank. And you can see the ship is turning towards that rate cut and that is what the pound has grasped on to. It’s definitely a much more concrete feeling that the next move is going to be a cut and it’s going to be coming, potentially, sooner than we thought, especially now that we don’t have those two hawkish votes.

"What might offer the pound a bit of support against the euro and the U.S. dollar, as we go towards the next meeting is the fact that inflation is still stickier in the UK and also the services sector is still holding up strongly, service-sector inflation at 6.1% is still very sticky."

COLIN ASHER, SENIOR ECONOMIST, MIZUHO BANK, LONDON:

"The meeting unfolded more or less as expected. The shift in the vote is dovish but its not especially dovish, as in a cutting cycle its the doves rather than the hawks that drive things. The rest of the committee don't need Mann and Haskel to lower rates.

"There don’t seem to be many cracks in the centre as yet – there were plenty of references to inflation persistence (and today’s PMI data don’t help on this front).

"May seems to be off the table for rate cuts unless something bad happens. June is possible but we still see August as most likely at this point."

SUSANNAH STREETER, HEAD OF MONEY AND MARKETS, HARGREAVES LANSDOWN, LONDON:

"The Bank of England has adopted the same stance as the Fed yesterday and the ECB ... indicating that inflation is following the right path, but it’s still wary about the potential for prices to bubble up again.

"Input costs are continuing to climb due to wage pressures and higher shipping fees, so companies are pushing up prices. So, it’s not surprising that caution remains the name of the game for the Bank.

"Continued stubbornness in wage growth could tip a decision by the Bank of England towards August instead (of June), when a fuller monetary policy report is published."

PHILIP SHAW, CHIEF ECONOMIST, INVESTEC, LONDON:

© Reuters. Road construction workers carry out work outside the Bank of England in the City of London financial district in London, Britain, February 13, 2024. REUTERS/Isabel Infantes/File Photo

"The decision to hold rates itself and the arguments which committee members are putting forward are no surprise.

"If the shift in the dynamics on the committees is representative of the MPC (Monetary Policy Committee) as a whole, then we maintain our current view that the Bank of England will begin to cut rates in June."

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