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The Bank of England has left Bank Rate unchanged at 5.25% once again, in line with consensus expectations and our forecast. The major change today instead came from two adjustments in the Bank’s communications.
Firstly, the vote split shifted progressively more dovish with a majority of 8-1 voting to hold rates, meaning the last two hawks on the MPC are now voting with the majority while Swati Dhingra continues to be the lone dove voting to cut rates. Second, the minutes explicitly dropped reference to the upcoming National Living Wage announcement, noting instead that risks to wage pressures are now balanced. While on the surface this suggests the Bank is moving towards easing rates, we don’t think this is likely before August. Come the May meeting, when the BoE will publish a fresh set of projections, policymakers will only have one further labour market report to judge the progression of wage pressures. This shouldn’t be sufficient to alter their current stance. Moreover, policymakers won’t have full visibility on the effects of the NLW rise come June. That said, there is a risk that with three more labour market reports by that point, policymakers gain sufficient confidence to cut rates without observing the second-round effects. In light of today’s commentary, risks now increasingly appear skewed towards an earlier start to rate cuts than we previously thought, although for the time being we are maintaining our call for the BoE to wait until August before it commences its easing cycle.
The minutes tilt in a dovish direction at first glance
Today’s more dovish than expected commentary comes as something of a surprise to us. First off, inflation has evolved almost exactly in line with Bank staff forecasts included in the February MPR. These projections saw headline inflation at 3.5% YoY in February, while the actual outturn undershot by a fraction at 3.4%. Meanwhile services CPI at 6.1% YoY came in exactly in line with the Bank’s own forecasts. Similarly, while the March budget had been flagged as a risk by the BoE previously, the lack of significant spending changes by the Chancellor should make the impact of this event minimal for policymakers. While clearly all this is good news, it also leaves the same upside risks that were present in February largely unchanged this month. Namely, underlying inflation remains high, and only set to cool slowly. This was emphasised just this morning in the March flash PMIs, a release historically watched closely by the BoE. Specifically, prices charged inflation rose to the highest level recorded since July 2023, with anecdotal evidence suggesting that higher salary payments were the main factor driving this increase. In a similar vein, risks should still be skewed to the upside too, not least given a National Living Wage rise due to come into force on April 1st. This is something that had previously been flagged by the BoE as important in their thinking. Whilst we doubt that it has been entirely discounted by the MPC, the absence of any mention in today’s minutes is potentially still significant.
This is doubly true given the appearance of a new line stating “the stance of monetary policy could remain restrictive even if Bank Rate were to be reduced, given that it was starting from an already restrictive level.” This would appear to be laying the groundwork for rate cuts over coming months, something we had only expected to happen in May.
While the minutes generally tilt in a dovish direction, confirming the signal from the shift in the voting split, it is notable that there appears to be a significant dispersion in views amongst the consensus group, with the minutes noting “a further accumulation of evidence on inflation persistence would be required to warrant a shift in the monetary policy stance, with members differing on the extent of evidence that was likely to be needed.” Accompanied by a suggestion that “They would continue to consider the degree of restrictiveness of policy at each meeting”, this would appear to keep every future meeting from this point forward live. Even so, we are inclined to think that one more round of labour market data due before the May decision would not be sufficient to change enough minds on the MPC. But with three more prints available before the June meeting, we now think there could be enough evidence to begin cutting rates in the first half of the year. That said, this is still not our base case. For the MPC to feel comfortable cutting in June, they would likely need to see a series of benign data readings over the next three months. This remains a high bar in our view, especially with the implementation of the NLW hike in April uncertain and set to muddy any readthrough from average earnings data in the coming months. On this basis, for now at least, we are retaining our call for an August start for rate cuts.
Despite our unchanged view on the start date for BoE easing, markets are taking today’s dovishness at face value. Set against the prospects of a higher terminal rate in the US following last night’s Fed decision, this has seen traders sell sterling on the risk that rate differentials are set to blow out in favour of the dollar.
Having enjoyed last night’s relief rally, sterling now finds itself with a stubborn hangover as traders punish the pound on the BoE’s dovish tilt
Authors:
Simon Harvey, Head of FX Analysis
Nick Rees, FX Market Analyst