BoE leave rates unchanged and gives mixed signals on rate cuts, GBP holds its ground

The Bank of England has left rates unchanged at 5.25% as widely expected. But the vote split from the Monetary Policy Committee (MPC) members did come as somewhat of a surprise, with seven members voting unchanged and two voting to cut. Swati Dhingra was expected to vote to cut rates by 25bps as she did in the previous meeting, but Dave Ramsden’s vote to cut was unexpected. This led to an initial kneejerk move lower in the pound as it gave a dovish feel to the meeting. This is the first time since January 2020 that two MPC members vote to cut rates. 

Despite the vote split, the tone in the accompanying press release continued to show a hawkish bias from the Bank of England. The main takeaway is that policy needs to be restrictive for an extended period to ensure that inflation will stay low, even if the moves in the last few months have been encouraging.

The accompanying updated projections showed forecasts for inflation and growth have both been revised since the previous ones in February. CPI is expected to return to 2% in Q2 of 2024, with longer-term forecasts having been revised lower. CPI is expected to be at 2.6% in one year (down from 2.8% in February) and at 1.9% in two years (down from 2.3%). Growth, however, has been revised upward, with GDP for Q1 expected to come in at 0.4% (vs 0.1%), with full-year growth in 2024 expected at 0.5% (vs 0.25% in February) and 1% in 2025 (vs 0.75%).

Bailey’s comments in the press conference focused on the encouraging signs that inflation will return to target in the coming months, but higher-than-expected wage and services inflation should give the bank pause for thought. When asked about the timing of rate cuts he pointed out that a change in the bank rate in June is neither ruled out nor a fact at this point, but he does believe that they will need to cut rates in the coming quarters, and could be at a faster rate than currently priced in by markets.

He also pointed out that there is no law that says the Federal Reserve must move before other central banks, which can be seen as a dovish view given recent speculation that the BoE will want to wait until the Fed cuts before cutting rates themselves. He also added that one small cut in the bank rate would still leave them with restrictive monetary policy, suggesting that the BoE may do a one-off rate cut and wait to see how the data evolves for a few months rather than set a continuous cutting cycle. This would allow Bailey and his team to cut sooner and assess the impact rather than trying to hold off as long as possible.

Concerning the technical setup, the pound had recovered from the initial pullback by the time the press conference was finished. GBP/USD managed to regain some bullishness on Thursday after a pullback caused the pair to drop below 1.26 at the beginning of the week. The short-term bias remains slightly clouded by indecision but the US dollar remains favoured over the pound regarding rate differentials, which could continue to exert bearish pressure on GBP/USD. Next week will see consumer inflation readings (CPI) for both the UK and the US meaning we could see some pickup in volatility. The currency with a stronger reading with regard to expectations will likely be favoured in the short term.

GBP/USD daily chart

(Past performance is not a reliable indicator of future results)