Central bank update: no change?

At Thursday’s Bank of England (BoE) meeting the committee voted to keep rates on hold by a majority of 7-2.

The decision to hold rates at 5.25% was widely expected by economists and market participants and the only real debate being whether Sir Dave Ramsden would join Swati Dhingra in voting for an immediate reduction in base rates to 5%. With this meeting being a Monetary Policy report month, there was more detail available around the BoE’s economic forecasts for market participants to delve into. And whilst the overall tone was more ‘dovish’ at the margin, there was very little to move the dial on when the BoE might start reducing interest rates; June became live for the first cut at the BoE’s March meeting. Today’s meeting increased the probability of a June cut, but only marginally, and only if the upcoming data allows.

Not long ago, the May 2024 meeting had been priced for the first cut. Some might question why the BoE didn’t cut at that meeting, given the state of the economy and BoE forecasts. On the former, growth is largely anaemic. The BoE Agents Surveys, that the BoE seem keen to place a high weight on, also suggest that parts of the UK economy are faring worse than some of the recent hard data indicate. More importantly, on their forecasts, the BoE have CPI (Consumer Price Index) inflation hitting the 2.0% target over the coming months and project it to be below target over the medium term. What seems to be keeping the BoE on hold for now is that there are a wide range of views amongst committee members about the persistence of inflation. Evidently, more confidence is needed that inflation can be brought back to target on a sustainable basis. By the time we get to the meeting on 20th June, the committee should be able to make a clearer judgement. June is in play, but it’s by no means a done deal. And that’s how markets have reacted; five-year gilt yields are largely unchanged at around 4.0%, whilst the market implied probability of a June cut sits at around 50%. With the Bank heavily data dependent, expect market volatility to remain high, particularly around key data points.

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