Bank of England continues to lean towards a more dovish stance

The Bank of England (BoE) decision to keep interest rates on hold today at 5.25% was in line with market expectations. However, the move from an 8-1 vote to a 7-2 vote for this ensures the BoE continues inching towards a more dovish stance, a change in direction that has been evident at the past couple of meetings of its Monetary Policy Committee (MPC) and in speeches and comments made by various MPC members during that time. And the fact that it is an internal member of the MPC that has dissented – a rare event in itself – provides a further signal that the MPC is getting ready to lower rates. The outcome is that, while August is still seen as the most likely month for a first rate cut to be delivered, the possibility of a June move can no longer be ruled out with the same degree of certainty as existed before today’s decision.

Whether we get a cut in June or not will be dependent upon the economic data released between now and then, the MPC stating that forthcoming economic data will “… inform the assessment that the risks from inflation persistence are receding”. Clearly the MPC remains concerned over the strength of wages growth and strands of underlying inflation persistence, such as services CPI, which continues to run at close to 6% and is falling back only slowly. In its decision today, the MPC has given itself time to review the two rounds of wages and inflation data that will come in between now and the June meeting, enabling it to see if wages growth is set to moderate (UK pay settlements tend to be concentrated in the early part of the year) as hoped and whether these underlying inflationary pressures are also weakening. It will also want to assess the impact of the decision to raise the National Living Wage by approximately 10% in April, to be sure that there are no lasting inflationary implications from this uplift.

But separate to this timing debate, the latest economic forecasts accompanying today’s decision - which showed CPI is expected to fall below target (to 1.9%) at the end of the forecast horizon in two years-time - is a clear signal that interest rates do need to be cut, a fact backed up by Governor Bailey in the press conference following the meeting when he indicated that markets were currently under-pricing the pace of easing going forward. A recent run of stronger than expected inflation data – in both the US as well as the UK – had seen the market scale back the degree of tightening expected this year, something Bailey has tried to push back against by saying that the UK inflation trajectory, and the economy in general, is more closely aligned with that of the euro-zone than the US. Today’s meeting very much reinforced this message.

So on balance, despite no commitment as to when a first rate cut will be delivered, as per the ECB, what we have been given is a signal that monetary policy decisions are now very much data dependent and that the chances of a June cut are higher than was previously considered – but the markets are left in the unenviable position of now having to reprice the future path of interest rates after each data release to come.