Market Analysis

The Bank of England is likely to take steps towards its first interest rate cut in four years due to falling inflation. However, it's expected to proceed cautiously about signaling an imminent move. In its May meeting, the central bank is widely anticipated to maintain the benchmark Bank Rate at 5.25%, the highest since 2008.

Investors are eager to know if the Bank of England hints at a potential cut in June, especially as the European Central Bank has signaled its intention to reduce borrowing costs. Some analysts suggest further caution is warranted, citing strong wage increases in the UK job market and uncertainty surrounding conflicts in the Middle East.

Market expectations lean towards a quarter-point rate cut by August, followed by additional cuts later in 2024. However, recent market activity indicates a growing possibility of an earlier move, with rate futures markets indicating nearly a 50-50 chance of a cut in June.

Matthew Swannell, a UK economist at BNP Paribas, notes that the Bank of England has learned that rate changes take longer to affect inflation than previously thought. Consequently, there's a desire to act swiftly to cut rates, especially as headline inflation is expected to dip below the 2% target soon. However, Swannell believes the Bank of England will refrain from explicitly signaling the timing of the first cut.

An early rate cut would be politically advantageous for Prime Minister Rishi Sunak, who is trying to assert that the economy is rebounding, although facing challenges from the opposition Labour Party.

If there's a shift towards a rate cut, it might be reflected in the voting pattern of the Monetary Policy Committee. While most economists expect an 8-1 vote to keep the Bank Rate steady, there's speculation that Deputy Governor Dave Ramsden might join those advocating for a cut.

Ramsden has hinted at the possibility of weaker inflation than forecasted, while Chief Economist Huw Pill has cautioned that rate cuts are still some distance away. Despite slower economic growth in the UK compared to the US and Eurozone, wage growth and services price inflation remain relatively high.

The Bank of England's updated inflation projection could provide further insight. A significant downward revision to the two- and three-year forecasts would be interpreted by investors as a signal that they're currently pricing in too few interest rate cuts.

Paraphrasing text from "Reuters" all rights reserved by the original author.