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9 May 2024 | FXGT.com

Bank of England Holds Rates with Optimistic Outlook for Future Cuts

  • Bank of England’s Optimism Amid Rate Decisions: The Bank of England (BoE) maintains interest rates at 5.25%, yet the tone of their latest policy statement suggests a shift toward optimism. This aligns with Governor Andrew Bailey’s recent remarks emphasizing the UK’s distinct inflation outlook compared to the US, signaling a potential upcoming rate cut.
  • BoE Policy Decision: The Monetary Policy Committee (MPC) voted 7-2 to maintain the current rate, with BoE policymaker Swati Dhingra and Deputy Governor Dave Ramsden advocating for a rate cut, surprising financial markets that had anticipated a unanimous or near-unanimous decision to hold rates.
  • Inflation and Economic Outlook: The BoE revised its inflation forecasts downward, now projecting inflation to decrease to 1.9% by Q2 of 2025 and further to 1.6% by the same period in 2026. The MPC emphasized its commitment to maintaining a restrictive policy stance until inflation sustainably reaches the 2% target.
  • Market Pricing and Expectations: Money market traders now see about a 45% chance of a rate cut at the BoE’s next meeting, with approximately 55 basis points of easing expected by the end of the year. This contrasts with more immediate easing expectations from the European Central Bank, set to begin in June.
  • Strategic Implications for June and August Meetings: The decision between a rate cut in June versus August will largely depend on the forthcoming April inflation data. Currently, an August rate cut remains the baseline scenario, but upcoming inflation figures could influence this timeline.
  • Sterling and Market Outlook: The slight weakening of Sterling following the policy announcement reflects the market’s reaction to the unexpected voting outcome and the ongoing uncertainty around the timing of rate cuts. The next few weeks will be critical for the BoE’s rate decision strategy as they continue to assess inflation trends and economic indicators.
  • Upcoming Economic Indicators: Attention is now turning to the UK’s economic data releases scheduled for Friday, including March’s monthly and preliminary Q1 Gross Domestic Product (GDP) data, expected to show a 0.4% growth for Q1 2024 after a contraction in the previous quarter. This data will provide further insights into the UK’s economic trajectory and potential recession depth.
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