Banks divided: Interest rate decision sparks debate over timing – June or August?
Investment banks are divided on when the Bank of England (BoE) may execute its initial rate cut.
As expected, the Bank of England kept interest rates steady on Thursday and noted that its current monetary policy was effectively managing inflation.
However, it cautioned that an interest rate cut in June wasn’t a certainty. Within the financial market, there’s a split among major players about when the Bank of England might lower its rates for the first time.
City A.M. gathered insights from six major investment banks, finding that three foresee a rate cut in June, while the other three suggest it might happen in August.
Some big names like Morgan Stanley, Deutsche Bank, and HSBC anticipate a June rate cut, whereas JP Morgan, Nomura, and Royal Bank of Canada predict it for August.
Currently, market indicators suggest an even chance of a rate cut in June and almost complete certainty for August.
“As we had expected, forecasts were dovish and Ramsden voted for a cut. Governor Bailey actually explicitly said more cuts than the market priced were likely to be delivered. And yet…the BoE could not quite commit to commencing the cutting cycle in June,” said Bruna Skarica, Chief UK Economist at Morgan Stanley.
“As the meeting was broadly in line with our view, we stick with our base case – 75bp of cuts this year, June start – but the ride will be bumpy, and the near-term risks hawkish.”
The Monetary Policy Committee (MPC) also showed a divide, with a 7-2 vote expected at the May meeting. Deputy Governor Dave Ramsden sided with Swati Dhingra in advocating for a rate cut, as anticipated.
The Bank emphasised its reliance on data, with two sets of labour market and inflation figures to come out before its next meeting in June.
“Before our next meeting in June, we will have two full sets of data for inflation activity and the labour market and that will help us in making that judgement afresh,” Andrew Bailey said.
A significant softening in services inflation figures or an easing in wage growth could prompt a policy change, while stickiness on either measure might prompt caution.
“Let me be clear, a change in Bank Rate in June is neither ruled out nor a fait accompli,” Bailey added.
“We stick with our call for an August cut for now, as a lot of data are still to come, but the odds vs. June look more evenly balanced and the onus is now more on the data to talk them out of easing,” said Allan Monks. UK Economist, J.P. Morgan.
George Buckley, Chief European Economist at Nomura said: “The onus now turns to the data – stronger prices and wages would support our August cut call, but the bar to an earlier (June) cut has clearly been lowered today”.
Investors are unsure if the Bank of England will follow the European Central Bank’s lead in cutting interest rates in June or wait longer, similar to the US Federal Reserve’s approach.
The Bank of England’s revised inflation forecasts for the next two to three years suggest that investors might be underestimating the likelihood of interest rate cuts.
The Bank now projects inflation to be 1.9 per cent and 1.6 per cent in two and three years respectively, below its two per cent target, compared to its previous projections of 2.3 per cent and 1.9 per cent.
“We think the MPC has laid the groundwork for a June rate cut. But the path to a late spring rate cut will have to go through two rounds of inflation and wage data,” said Sanjay Raja, Senior Economist at Deutsche Bank.
“Big beats in the forthcoming inflation data could further delay the start of a gradual easing cycle, but we think the bar for large hawkish surprises is very high given the tweaks to the Bank’s near-term projections. Overall, we continue to expect the MPC to deliver three quarter-point rate cuts this year (75bps) – in line with our long-held view.”
