The Bank Holds Rates ... The Doves Take Flight ...

The Doves Take Flight ...
At the MPC meeting this month, the committee voted to maintain bank rate at 5.25%. Two members of the MPC, Dave Ramsden and Swati Dhandri voted against the proposition. Two doves take flight, preferring to reduce Bank Rate by 25 basis points to 5%.

The Bank of England's decision to hold the base rate for a sixth consecutive meeting came as little surprise. Inflation is due to fall below the target rate of 2.0% when data for April comes out later this month, largely impacted by the Ofgem rate cap.

The Bank expects inflation to rise back above target in the coming months ending the year at around 2.5%. Service sector inflation remains and high rates of wage growth will impede the path to lower inflation, it is said.

Nevertheless the Governor Andrew Bailey was remarkably dovish. "It is likely we will need to cut rates in coming quarters, more than implied in the current market forecasts." he said.

The possibility of a rate cut in June returns. "June rate changes are neither ruled out nor a fait accompli", teased the Governor. Don't you just love it when central bankers talk French.

Strong growth figures in the U.S. in the first quarter, imply there will be no Fed rate cut in the Summer months. But the Governor explained, "There is no law which says the Fed must move first and everyone else moves afterwards". [It's just usually like that!].

GDP growth is expected to pick up, slack is likely to increase, excess supply is likely to appear, second round effects on wages and prices are expected to ease as real incomes grow to offset wage round pressures. All this suggests a path to lower rates but the Governor cautions ...

"Inflation must come back to target on a sustainable basis". Then the usual boiler plate. ...
"The MPC remains prepared to adjust monetary policy as warranted by economic data to return inflation to the 2% target sustainably. It will therefore continue to monitor closely indications of persistent inflationary pressures and resilience in the economy as a whole, including a range of measures of the underlying tightness of labour market conditions, wage growth and services price inflation."

"The Committee will consider forthcoming data releases and how these inform the assessment that the risks from inflation persistence are receding. On that basis, the Committee will keep under review for how long Bank Rate should be maintained at its current level."

Economists at Swiss bank UBS were among those who shifted their view on when the BOE may lower interest rates, saying they were now expecting the first rate cut to take place in June rather than August.

"The broader message and the tone of the MPC were more dovish than we had anticipated," economists said, in a note published after the BOE's latest interest rate decision.

UBS cited changes to the BOE's forward guidance, inflation expectations and comments from Bailey regarding the impact of increased national living wages on overall wage growth as reasons for its changed expectations. The Swiss bank now expects rates to be cut in June, August and November, by 25 basis points each.

Our Friday Forward guidance remains. We expect the first cut could be as early as June, with two further rate cuts possible by the end of the year. This is the dovish scenario but watch the  data!