UK interest rates: Still two voting for a hike… but closer to a cut

As expected, the Bank of England (BoE) Monetary Policy Committee (MPC) voted to keep rates on hold at 5.25%, with two rather than three voting for a rate hike this time (Mann and Haskel) and one MPC member voting for a cut (Dhingra).

There was a sense of the MPC moving towards cuts, but not a sense that they are in a hurry here; they didn’t endorse the market profile for cuts and it is clear that hiking rates was still some part of the discussion given that two MPC members voted for it.

The language in the minutes is more dovish than last time:

1. They have started addressing the question of when to cut rates: “There were questions, on which further evidence would be required, about how entrenched this persistence would be, and therefore about how long the current level of Bank Rate would need to be maintained.”
2. The previous minutes had referenced the decision to hold or hike as being “finely balanced”; that was absent this time.
3. There was a sense in the way they look at the data of them moving towards a cut – pointing out that downside news on Consumer Price Index (CPI) had been broad-based, reflecting lower fuel, core goods, and services inflation. They also say that “In the Committee’s February forecast, the risks to inflation were more balanced.”
4. The language in the minutes is now that “The Committee had judged since last autumn that monetary policy needed to be restrictive for an extended period of time until the risk of inflation becoming embedded above the 2% target dissipated.” Previously that “extended period” language was in the present tense.

Crudely – the signal from the Bank was that the next move in rates is probably a cut (albeit not expressed in a straightforward way): Governor Bailey said “I will re-emphasise that framework, we have taken away the upside bias and I am very clear that the decision and the question we face now is for how long we have to maintain this stance and we will not maintain it any longer than we need to do to achieve the objective of inflation being at 2% on a sustained basis.”

There was a somewhat similar message to Federal Reserve (Fed) Chair, Powell, in terms of emphasising the need for more evidence/confidence that inflation was heading sustainably to the 2% target first. In so many words, they have become a bit less worried about the issue of inflation persistence, but aren’t ready to cut rates yet. As for what they will be watching to get that confidence, services inflation and pay growth got repeat mentions throughout the press conference and are mentioned prominently in the key sections of the minutes.

The forecasts also send a message that they will need to cut…but not as much as the market expects: Using the market trajectory for interest rates (which they have as rate cuts from Q2 2024, 100bps of cuts by the end of this year and a bit less than that in cuts the following year), CPI on their forecasts is above the 2% target at the two-year horizon, but at target at the three-year horizon. Their focus is normally thought of as being more two-year than three-years ahead, so their forecasts are signalling that the market has too much, too early, priced in for rate cuts. The way they describe these forecasts in the statement strengthens that signal: “Conditioned on a lower market-implied path for Bank Rate than had underpinned the November Report, CPI inflation was then projected to remain above the 2% target over nearly all of the remainder of the forecast period, owing to persistence in domestic inflationary pressures.”  

Governor Bailey wouldn’t be drawn on how likely a cut was at the next meeting (unlike Chair Powell at the Fed's press conference). He said that between now and the next meeting they will get two sets of inflation and labour market data, so plenty of data to work with. There were mentions in the press conference of them taking things meeting-by-meeting.

The BoE may well lag the Fed/ European Central Bank (ECB) in rate cuts: The BoE are in a somewhat different place to the ECB or Fed. Deputy Governor Ramsden made the point that services inflation was running higher in the UK than it was in the euro area or US.

My central case is unchanged at this stage: I am still assuming for now that the BoE doesn’t start cutting rates until Q3 and at a roughly 25bps a quarter pace, but with a significant risk of them cutting sooner (read, May/June) depending how the data – especially pay and services inflation - evolves. I suspect it will take a few months rather than weeks before they have the confidence they need to cut – i.e. to feel confident that inflation is sustainably, not just briefly, heading to 2%.

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