City traders this week upped their bets that the first interest rate cut of the cycle could come at the Bank of England’s very next meeting in May, after yesterday’s meeting in which no Monetary Policy Committee members voted to raise rates.
Before the start of this week, City markets implied a less than 10% chance of interest rates being cut in the Spring.
The Bank opted against an interest rate cut on Thursday, as was widely expected. But as the City pored over the latest comments out of Threadneedle Street - and the 8-1 vote with no Monetary Policy Committee members believing rates should be hiked further - they upped their bets on rate cuts coming sooner.
Forecasts that the US Federal Reserve would cut soon, and a surprise cut from the Swiss National Bank, which became the first major Western central bank to reduce rates, also helped boost expectations of the Bank of England following suit.
A summer rate cut is still seen as the most likely option, with June rather than August now the most likely option.
But May is no longer seen as a long shot. Traders are now pricing in a roughly one-in-four shot the Bank cuts at its next meeting.
By the time the Bank meets in May, inflation may already be below 2%, as the latest energy price cap will lead to lower bills. Economists think it will cross that mark in either April or May. However,Andrew Goodwin, chief UK economist at Oxford Economics, noted that official April inflation figures won’t have been published yet by the time of the early May meeting.
Goodwin said: “The lack of data releases before the next meeting means we still think there's a relatively low probability of a May cut. June continues to look the most likely timing for the first reversal, with the April data for core inflation and pay growth likely to prove decisive.”
TIm Graf, Head of EMEA Macro Strategy at State Street Global Markets, noted that one key line from the Bank was that “policy could remain restrictive even if Bank Rate were to be reduced”. This suggests the Bank believes that its battle with inflation would not need to be won before it makes the first cut, as a reduction to 5% will still leave rates higher than they otherwise had been since 2008.
Graf said: “While the Bank noted that ‘they are not yet at the point’ of cutting rates, emerging softness in the labour market data and sufficient progress in inflation returning to target suggest the wait will not be long. In their own words, policy is not only restrictive, it will remain so even after cutting rates. The institution at long last has an easing bias and the first cut will likely come no later than the June meeting, potentially as soon as May.”
