BoE signals dovish shift

BoE hints at rate cuts, signaling a dovish shift. Governor Andrew Bailey's suggestions of deeper cuts than expected stir market anticipation.

By Ahmed Azzam | @3zzamous | 9 May 2024

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  • BoE maintains Bank Rate at 5.25%, aligning with market expectations.

  • Governor Andrew Bailey hints at future rate cuts, signaling a dovish shift.

  • BoE to closely monitor economic data to assess inflation risks.

  • CPI inflation projections depict a downward trend over the coming years.

Bank of England (BoE) Governor Andrew Bailey hinted at potential future rate cuts during the Bank's recent monetary policy meeting. Bailey suggested that it's probable the BoE will need to reduce the Bank Rate over the forthcoming quarters, indicating a dovish outlook on monetary policy.

Furthermore, Bailey suggested that the extent of rate cuts might exceed what is currently priced into market rates. This statement implies that the BoE could pursue a more aggressive easing path than what is currently anticipated by market participants.

The Bank of England (BoE) opted to maintain its Bank Rate at 5.25% during its latest monetary policy meeting, aligning with widespread market expectations. However, the announcement subtly unveiled a dovish tilt, evident in both the voting pattern and adjustments within the accompanying statement. While these shifts may not be robust enough to necessitate an immediate rate reduction in June, they do signal a gradual approach towards easing monetary policy.

The meeting culminated in a 7-2 voting split, with Deputy Governor Dave Ramsden aligning with the traditionally dovish stance of Swati Dhingra in advocating for a rate cut. Furthermore, the BoE explicitly articulated its intention to closely monitor incoming economic data to evaluate whether risks stemming from "inflation persistence" are subsiding, thus influencing the duration for which the current Bank Rate is upheld.

Moreover, the updated economic forecasts released by the BoE indicate upward revisions in GDP growth projections, coupled with a downward adjustment in CPI expectations for the foreseeable future.

In terms of GDP growth, projections indicate a trajectory of improvement, with four-quarter GDP growth anticipated to reach 0.2% in Q2 2024, a revision up from the previously forecasted 0.1%. Subsequent projections foresee growth accelerating to 0.9% in Q2 2025, 1.2% in Q2 2026, and 1.6% in Q2 2027.

Conversely, CPI inflation projections depict a downward trend over the same period. In Q2 2024, CPI inflation is forecasted to decline to 2%, then to 2.6% in Q2 2025 (down from the initial 2.7%). Further declines are anticipated in subsequent years, with CPI inflation projected at 1.9% in Q2 2026 (down from 2.2%), and then a notable drop to 1.6% in Q2 2027.