The Bank of England decided to maintain interest rates at their current levels of 5.25% in a 7-2 vote by the Monetary Policy Committee, with some members in favor of a rate cut. The committee cited that indicators of inflation persistence remain elevated, with services inflation at 6% in March. The central bank mentioned that geopolitical issues were adding upside risks to the near-term price outlook. The BOE will consider upcoming data releases before making a decision on rates at their next meeting on June 20.
There is anticipation for the BOE to begin cutting interest rates in the summer, with market pricing indicating a 45% probability of a cut in June. Some economists are forecasting a rate cut as soon as June, while others predict it will happen in August. U.K. headline inflation is expected to drop below the BOE’s 2% target in April due to lower energy prices. The bank expects headline inflation to be close to 2% in the near-term, increasing slightly later in the year as the drag from the energy market wanes.
BOE Governor Andrew Bailey mentioned that the latest figures are encouraging, but cutting Bank Rates is not yet a possibility. The central bank expects U.K. gross domestic product to grow by 0.4% in the first quarter of the year and by 0.2% in the second quarter. Bailey highlighted the importance of monitoring data releases and emphasized that each meeting is a new decision. The central bank’s decisions are taking place ahead of a U.K. general election, with speculation on when Prime Minister Rishi Sunak will call the election.
The BOE’s cautious messaging on interest rates differs from the European Central Bank, where policymakers have guided for a June rate cut. Other European central banks like the National Bank of Switzerland and Sweden’s Riksbank have already cut rates, putting them on a swifter timeline than the U.S. Federal Reserve. U.S. inflation rose more than expected in March to 3.5%, leading to a decoupling of rate expectations between the U.S. and the U.K. Capital Economics noted that the BOE’s messaging suggests it may not cut rates at the next policy meeting in June.
The BOE is setting the stage for a potential summer rate cut, with uncertainty whether it will happen in June or August. Wage data may play a key role in determining when the cut will occur. HSBC Asset Management’s director of investment strategy believes that European rate cuts are imminent and likely to happen before the Fed makes any moves due to stickier inflation in the U.S. The easing of European monetary policy and signs of a cyclical rebound support the outlook for the region’s equity markets, which have performed well this year and remain attractively valued.
