Andrew Bailey Signals Bank of England May Cut Rates More Quickly Than Expected
The Bank of England sent its clearest signal yet that it was closing in on interest rate cuts, with Governor Andrew Bailey indicating markets were underpricing the pace of easing in the months ahead.
(Bloomberg) -- The Bank of England sent its clearest signal yet that it was closing in on interest rate cuts, with Governor Andrew Bailey indicating markets were underpricing the pace of easing in the months ahead.
The BOE governor made his comments after the UK central bank voted 7-2 to keep the base interest rate at 5.25%, a decision announced Thursday in London. Notably, Deputy Governor Dave Ramsden joined external member Swati Dhingra in calling for an immediate cut, indicating support within the bank to move rates off a 16-year high. The other seven members of the Monetary Policy Committee preferred no change, saying they needed more evidence that inflation will be subdued.
Bailey told a news briefing after the decision that a change as soon as the bank’s next meeting on June 20 “is neither ruled out nor a fait accompli,” highlighting the importance of two rounds of inflation and wage data expected before then. But it was his remarks on markets that will draw the most attention, since the governor has in past expressed reluctance to directly comment on investor expectations for future rates.
“It’s likely that we will need to cut bank rate over the coming quarters and make monetary policy somewhat less restrictive over the forecast period, possibly more so than currently priced into market rates,” Bailey said.
Markets reacted cautiously to the BOE’s actions. Traders priced a 50% possibility for the first 25 basis-point cut to come next month, and continued to fully priced in a cut by August. Markets now imply a total of 59 basis points of cuts through 2024, compared to 54 basis points before.
With the governing Conservatives trailing the main opposition Labour Party by more than 20 points in recent polling, the change in mood music from the MPC will be a boost to Prime Minister Rishi Sunak as he seeks to persuade voters that his plan to turn the UK economy around is working. He must hold a general election in the next 9 months, and Chancellor of the Exchequer Jeremy Hunt has repeatedly talked up the possibility of reductions, saying they would give voters a “feel-good factor.”
“Dissent from an internal member is rather rare and should be taken as a strong signal that the BOE are ready to cut rates,” said Michael Brown, a strategist at Pepperstone Group Ltd. in London. “This represents a further dovish pivot from the MPC, increasing the likelihood that the first bank rate cut is indeed delivered at the next meeting in June.”
The bank for now left its benchmark lending rate firmly in territory it describes as restrictive, aiming to bear down on wage and price pressures that reached a four-decade high in late 2022. Forecasts released with the decision suggested the BOE would have to reduce rates in the coming months, probably before the general election, which is widely expected in the autumn.
“We’ve had encouraging news on inflation, and we think it will fall close to our 2% target in the next couple of months,” Bailey said in a statement. “We need to see more evidence that inflation will stay low before we can cut interest rates. I’m optimistic that thing are moving in the right direction.”
BOE officials estimate inflation, which peaked in excess of 11%, will slide back to the 2% target in the second quarter, due to lower energy bills and then rise more gently than previously estimated later in the year. However, it warned of upside risks from “geopolitical factors.”
Under market expectations for two quarter-point cuts this year and a slow decline to 3.75% in the middle of 2027, inflation drops below target at the end of the second year of the forecast and is even further below a year later — a further sign that a move in either June or August is in play.
“The restrictive stance of monetary policy is weighing on activity in the real economy,” the bank said in minutes of the meeting.
The BOE also adjusted its guidance about how policy would develop. It kept the line that “policy could remain restrictive even if Bank Rate were to be reduced” and added that it would watch the “forthcoming data releases and how these informed the assessment that the risks from inflation persistence were receding.”
That comment will increase market scrutiny on the two sets of inflation and wage data that are due to be released before the bank’s next meeting. Some economists have said that inflation could dip below the 2% target during that period, increase pressure on the bank to act.
Stronger-than-expected recent inflation readings both in the US and UK had led investors to scale back expectations for further easing after an expected cut in August, but Bailey in recent weeks — along with Ramsden — has pointed out that Britain’s economy is tracking developments in the euro zone more than in the US, and the European Central Bank is expected to deliver a cut next month.
An early cut by the BOE could put it at odds with the US Federal Reserve, which is not expected to ease its policy until later in the year, and align it with the European Central Bank, which has given a strong steer it will cut rates in June. Sweden’s Riksbank cut its rate for the first time since 2016 on Wednesday.
Leaving rates unchanged under the BOE’s forecasts would produce a spike in unemployment to 5.9% by the end of 2026 — a full point higher than if rates follow the market path and well above the current level of 4.3%.
On the economy, the BOE estimated that last year’s shallow recession has finished and that the economy will grow 0.5% this year and 1% in 2025. That’s an upgrade from its February forecast for 0.25% and 0.75%.
Officials also forecast a big improvement in living standards, with average wage growth of 5.25% this year, well above inflation. Real post-tax household income will now expand 1.75% this year, above the 2010-2019 average, though some of the upgrade was driven by higher population estimates.
The bank also said “key indicators of inflation persistence were moderating,” although pay and services inflation are still too high. The MPC said there were signs that the labor market is loosening as well, with the bank saying it now no more tight than it was before the pandemic.
While Catherine Mann, Jonathan Haskel and Megan Greene all recently signaled their reluctance to back a quick move, citing strong wage growth and services inflation, today’s decision will fuel the perception that a rate cut is moving closer.
Craig Inches, head of rates and cash at Royal London Asset Management, said he expects that to come in June or August. “This is a fairly dovish hold,” he said.
--With assistance from Naomi Tajitsu.
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