Bank of England Hawks Drop Their Push For Hikes As Rates Remain At 5.25%

(Bloomberg) -- Two of the Bank of England’s most ardent hawks withdrew their support for interest rate hikes, as the UK’s central bank voted for a fifth-straight meeting to keep policy unchanged. 

Catherine Mann and Jonathan Haskel joined an 8-1 majority on the Monetary Policy Committee to keep rates at a 16-year high of 5.25%, the latest sign that the BOE was edging toward easing policy later this year. The vote represented the first time since September 2021 that no member of the panel had supported an increase.

The pound fell, and bonds gained after the decision that markets interpreted as a more emphatic push toward lower rates. The central bank is trying to balance its efforts to ensure inflation sticks near its 2% target against weakness in the economy, which slipped into recession last year.

Governor Andrew Bailey cautioned that officials are “not yet at the point where we can cut interest rates.” The bank’s guidance that officials would “keep under review” how long rates should be kept at their current level was left unchanged. However, the minutes added language that the MPC recognized that policy could remain restrictive even if rates were cut.

“Good progress in disinflation has allowed recent communications to strike a significantly less hawkish tone,” said Hussain Mehdi, director of investment strategy at HSBC Asset Management. “This is reflected in the BOE hawks falling in line with the majority vote to hold at today’s meeting.”

The pound slipped and UK bonds rallied as traders added to bets for monetary easing this year. Markets priced in around 80 basis points of cuts in 2024 compared to 75 basis points before the decision. Sterling fell as much as 0.5% to $1.2726.

Investors anticipate the first BOE rate cut in August but believe there is a more than a two-in-three chance of a move in June. The Federal Reserve’s signal last night that three cuts are in store in the US this year helped to fuel bets on reductions in the UK.

What Bloomberg Economics Says ...

“The Bank of England took a big step toward cutting interest rates, at its March meeting. There was a dovish shift in the vote split and an acknowledgment that its policy stance will remain restrictive even if it eases. May still looks too early for the first move, though the outcome of the March decision suggests the next meeting is likely to be ‘live’. Our view is that the first cut will come in June.”

—Dan Hanson and Ana Andrade, Bloomberg Economics. Click for the REACT. 

While Bailey and the majority of the MPC opted for no change, a shift away from hawkishness marked another step toward lower rates. Mann and Haskel surprised investors by voting for higher rates just last month, which prompted markets to scale back bets on reductions over the last few weeks. Swati Dhingra voted for a second meeting in a row for a quarter-point cut and is the bank’s sole voice for loosening policy now. 

The meeting continued the narrative shift by the BOE as it adjusts to the sharp decline in inflation in recent months, with economists predicting that the Consumer Prices Index could soon fall below the bank’s 2% target. Policymakers led by Bailey have repeatedly stated concerns that underlying price pressures, including wages, could push inflation back up if the bank cuts rates too soon. 

A reduction in interest rates easing the pressure on household finances may provide the Prime Minister Rishi Sunak’s Conservative government a rare tailwind ahead of a general election expected later this year. The Conservative party’s plunge in the polls has coincided with a period of economic instability with households squeezed by the cost of living crisis and soaring mortgage rates after 14 back-to-back BOE hikes.

“We’re not yet at the point where we can cut interest rates, but things are moving in the right direction,” said Bailey in a statement released wuth the decision. “In recent weeks we’ve seen further encouraging signs that inflation is coming down. We’ve held rates again today at 5.25% because we need to be sure that inflation will fall back to our 2% target and stay there.”

Investors increased bets on rate cuts in the UK before the meeting after the Fed signaled on Wednesday that it is still on track for three reductions to borrowing costs this year despite a recent tick up in inflation. It was then followed by a surprise rate cut at the Swiss National Bank on Thursday morning.

The BOE decision comes after growing evidence of the labor market loosening and price pressures cooling in recent weeks. Data on Wednesday showed inflation stepping down to a 2 1/2 year low of 3.4% in February, with services inflation cooling to 6.1% in line with the BOE’s forecasts. Last week jobs data also showed unemployment rising for the first time since last summer and wage growth edging lower.

Since the BOE’s last meeting, official data has shown the UK suffered a shallow technical recession in the second half of 2023. 

Bailey has played down its significance after a pick-up in activity at the start of 2024, though the BOE expects another tepid year of growth. The minutes said the BOE continues to expect a 0.1% rise in GDP in the first quarter of 2024 and another small rise in output in the second quarter.

Chancellor of the Exchequer Jeremy Hunt said in the formal exchange of letters with Bailey after the meeting that policymakers should hold firm. 

“The plan is working to bring inflation down, but we must not be complacent,” Hunt said. “While external cost pressures have lessened, domestic inflation pressures remain more persistent.”

Hunt told broadcasters on Wednesday that he was expected rate cuts in the next few months, as inflation drops to the 2% target. “As inflation gets closer to its target, that opens the door for the Bank of England to consider bringing down interest rates,” he said.

--With assistance from Constantine Courcoulas, Philip Aldrick, Irina Anghel and Andrew Atkinson.

(Updates market reaction and adds comment.)

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