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The Bank of England (BoE) kept interest rates unchanged at 5.25% at its May meeting. Market participants anticipated this decision, which reaffirms the commitment to returning inflation to the 2% target.
The decision was made with a 7-2 split in the vote. Monetary Policy Committee (MPC) members Swati Dhingra and Dave Ramsden dissented, advocating for a rate cut.
However, the most significant news stems from the updated BoE’s economic projections and Governor Andrew Bailey‘s comments.
The BoE now anticipates that headline inflation will decline to 1.9% in two years and to 1.6% in three years. This forecast indicates that price pressures are expected to fall below the target over the monetary policy horizon.
As such, Bailey adopted a dovish tone during the press conference. The bank will likely need to cut rates “over the coming quarters” and “more than is currently priced into market rates,” he said.
The bank will now be guided by upcoming data when making rate decisions. Bailey did not rule out the possibility of a June rate cut. There will be two inflation readings before that meeting.
Bailey mentioned that a “small cut” would still maintain a restrictive monetary policy stance.
Regarding comparisons and differences with the U.S., Bailey highlighted that UK inflation dynamics differ from those in the U.S., hinting that they are becoming more similar to those witnessed by the eurozone, which have receded recently.
He also highlighted that no rule states the Fed must move before other central banks. This hint suggests that the BoE could cut rates earlier than the Fed.
“I was completely comfortable when I voted to reduce the bank rate to continue quantitative tightening in the background,” BoE member Dave Ramsden stated, firmly countering the suggestion that asset sales—quantitative tightening—are contradictory to potential monetary easing.
Market Reactions: Gurpreet Garewal at Goldman Sachs Asset Management remarked that the shift in the vote split suggests that a BoE rate cut in June is "plausible." That’s assuming that the labor market, wages, and inflation all evolve as the bank anticipates.
The British pound remained mostly stable against the dollar, partially recovering from losses following the BoE’s statement. Policy-sensitive two-year gilt yields fell by about 5 basis points to 4.27%. This signals increased market expectations of an imminent BoE rate cut.
Traders have now fully priced in a 25 basis-point cut for August, while a June cut is perceived as a toss-up.
UK stocks edged higher, with the FTSE 100 index, as broadly tracked by the iShares MSCI United Kingdom ETF (NYSE:EWU), rising by 0.6%.
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Posted In: EWU
