- Bank’s MPC will meet for interest rate decision on Thursday afternoon
- There is a chance the bank will opt to cut but markets think it will wait until June
- Bank is unlikely to risk hiking too quickly as Fed stalls
The Bank of England could leapfrog the US Federal Reserve and European Central Bank this week with a first base rate cut.
Markets are pricing a small but growing chance that the BoE’s Monetary Policy Committee will opt to cut at its meeting on Thursday, following a more dovish tone struck at its April meeting and an expected sharp fall in upcoming inflation figures.
The BoE is expected to cut base rate twice in 2024, potentially taking it from its current level of 5.25 per cent to 4.75 per cent by year-end.
But forecasters say the scale of BoE cuts will be limited by a slower start from the Fed, which faces a more stubborn inflationary picture, amid concerns about the potential impact on sterling.
The Bank of England’s Monetary Policy Committee will meet on Thursday
Current market pricing shows a roughly 50 per cent chance of base rate falling to 5 per cent after the MPC’s 9 May and 20 June meetings.
The bank may opt to wait until after the inflation data for April in published later this month, amid expectations of a much lower reading and having fallen to 3.4 per cent in March.
The April data will reflect a 12 per cent annual fall in energy bills, as much lower core goods, food and services inflation, according to ING forecasts.
Official inflation data is expected to show a sharp fall over the next two months
Nick Chatters, Aegon Asset Management portfolio manager, said: ‘We’re going to get a big drop in headline inflation for the April print.
‘That’s going to be important optically for the market but we know it’s coming.
‘The bank’s communication so far, which is completely reasonable, is that a rate cut is still on the table for June but it’s going to be dependent upon any surprises to that [CPI] number – we could see a sub-2 per cent print, which optically would be very important.’
Markets are also now all but certain of a looming June cut in eurozone interest rates on the back of recent dovish commentary from the ECB, improving growth data and falling inflation.
But Chatters cautioned that both the BoE and ECB will likely be held to a maximum of two cuts this year in the context of Fed trepidation.
He said: ‘Coming into 2024 we had six Fed cuts priced for the end of this year – We’ve now got just over one and we’ve seen inflation go sideways.
‘The BoE and ECB can easily get started [on rate cuts], but they just can’t keep going without the Fed.’
US consumer price inflation remains stubbornly high
Can the BoE move before the Fed?
Weighing on chances of a BoE cut is the knowledge that widening the interest rate gap between the UK and US would drive sterling lower against the dollar, having a negative impact on capital flows and inflation.
Morgane Delledonne, head of investment strategy at Global X ETFs, said: ‘The effect of asynchronous rate cuts by the ECB or the BoE would likely lead to a strong depreciation of the euro or the sterling against the US dollar and other major currencies, possibly being counterproductive at trimming inflation since it would make imports more costly, but will certainly improve competitiveness of the regions and boost exports.
‘The ECB and the BoE will likely leave the current rates unchanged and self-inflict demand reduction as long as it needs to push down inflation and as long as unemployment remains at record lows.’
The US Fed has recently calmed fears it could opt for a rate hike, but markets still don’t expect the US central bank to start making cuts until September or even November.
Kristina Hooper, chief global market strategist at Invesco, said there is a ‘possibility’ of a BoE rate cut on Thursday ‘especially after the Fed’s dovish performance last week’.
She added: ‘If there is not a rate cut this week, I fully expect a dovish BoE that will signal rate cuts may start this summer, most likely in June like the European Central Bank is messaging.’
And analysts at ING think the ‘link’ between Fed and BoE policy ‘is often overstated’, giving the UK bank more scope to diverge from the US rate cycle if it sees fit.
ING said: Concerns about the impact of a weaker currency have probably taken a back seat.
‘Not only is inflation much lower and there’s greater confidence about the disfination in the pipeline, sterling has been one of the more resilient G10 currencies in the face of renewed dollar strength.
‘In a sense, that offers a bit of a cushion against any fresh weakness and feedthrough to inflation.
‘In short, we don’t think the BoE would have many qualms about cutting rates before the Federal Reserve, nor moving a little more quickly in subsequent meetings.’
2024 rate cut expectations are creeping up in the UK relative to the US