The Bank of England is set to meet for the third time in 2024 on Thursday. The decision on interest rates will be announced along with the release of the Monetary Policy Report and minutes of the meeting. Market expectations do not anticipate a change in the current bank rate of 5.25%. Instead, the focus will be on inflation projections, voting patterns, and rhetoric from the press conference.
Since the last meeting in March, economic data has been mixed. The first quarter of 2024 showed signs of growth, as indicated by PMI surveys. Despite higher interest rates, the housing sector has shown signs of life. However, inflation remains a concern for the BoE, with core CPI remaining above 4% for the 28th consecutive month. Average earnings continue to grow, leading to concerns about sustainable return to 2% inflation.
The upcoming Monetary Policy Report will reveal the latest quarterly forecasts, including predictions for inflation. If forecasts show a drop below the 2% threshold for 2026, market expectations for rate cuts may increase. On the other hand, an upward revision of inflation outlook could catch the market by surprise and raise the bar for rate cuts.
Although members Mann, Haskel, and Greene have consistently voted for rate hikes, recent economic conditions have led them to side with the majority. It is likely that they will continue to do so in the upcoming meeting, despite acknowledging the need for progress on the inflation front. The possibility of a rate hike remains uncertain.
Given recent economic developments and the Fed’s stance on rate cuts, the BoE may not show a dovish shift in the upcoming meeting. While markets are pricing in a rate cut by September, inflation continues to pose a challenge for the BoE. Governor Bailey is expected to maintain a somewhat dovish stance at the press conference, emphasizing the importance of inflation forecasts.
Market analysts are divided on the possibility of a rate cut in June. A decision to pre-commit to a rate cut could weaken the pound against the euro, potentially pushing the euro/pound pair towards the April 2024 highs. Conversely, if the meeting is uneventful, the pound may strengthen and the currency pair could drop towards previous lows.
The upcoming BoE meeting holds significant importance for the future of interest rates and the economy. With inflation remaining a key concern, market reactions to the quarterly forecasts and BoE’s decision will shape the trajectory of monetary policy in the upcoming months.