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Probability of Interest Rate Cut by Bank of England Grows

The Bank of England on Thursday, February 1, is likely to keep the interest rates at 5.25%, keeping this indicator within what can be described as sustainable stability.

Probability of Interest Rate Cut by Bank of England Grows

Market observers will closely monitor the decision of the financial regulator of the United Kingdom. Considerable attention will also be paid to the Bank of England’s vision regarding the prospects of the British economic system. Moreover, market observers will be watching for possible hints from the financial regulator concerning decisions related to interest rates.

On Wednesday, January 31, the market estimated a more than 96% probability that the Monetary Policy Committee of the Bank of England will decide to keep interest rates at the current level, which is historically high. This point of view is based on the fact that significant progress has been recorded in three indicators of inflation persistence of the financial regulator.

The British labor market is currently showing signs of recovery. At the same time, the overall trajectory continues to be uncertain. Wage growth and inflation in the sphere of services significantly changed the November forecasts of the Bank of England in the direction of lowering interest rates. The corresponding statement was made by Goldman Sachs economists at the end of last week.

Goldman expert Ibrahim Quadri said he expected a 9-0-0 split of votes to be recorded on Thursday without disagreement. At the same time, the expert separately noted that the division of votes is difficult to predict, given the comments of the members of the Monetary Policy Committee. At the December meeting, there were three dissenting votes for a further increase in interest rates. According to Ibrahim Quadri, on Thursday there may be a dovish dissent in the form of Swati Dhingra voting for a 25bp cut and/or a hawkish dissent in the form of Catherine Mann voting for a 25bp hike. According to him, hawkish disagreements are less likely, given that since the last meeting of the financial regulator, a moderate increase in underlying services inflation has been recorded.

In December, the annual consumer price index (CPI) for services in the United Kingdom was 6.4%. In November, this figure was fixed at 6.3%. In September, the CPI was 6.9%.

In December, overall inflation in the United Kingdom unexpectedly showed a growth of 4% year-on-year. The increase in this figure occurred against the background of a growth in the price of alcohol and tobacco. The core CPI remained unchanged in December, keeping at 5.1%.

The United Kingdom’s economic system continues to avoid a technical recession. In this case, the reality turns out to be better than the expectations of many experts. The technical recession has not become an objective fact of reality, despite the sluggishness of the British economy. At the same time, some experts still continue to predict a negative scenario. In their opinion, at some point, the economic system of the United Kingdom will one way or another face a technical recession.

Ibrahim Quadri says that the updated forecasts of the Bank of England, which will be released on Thursday, are likely to record a significant adjustment towards strengthening growth expectations. Also, in his opinion, its near-term inflation forecast will be reduced. At the same time, he notes that towards the end of the forecasting horizon, the financial regulator’s vision of the prospects for developing the state of affairs in the economic space may be revised upwards due to the low base rate.

Ibrahim Quadri expects the Monetary Policy Committee to maintain its approach. Also, in his opinion, the thesis that monetary policy should be quite restrictive for a long period will be publicly repeated. The expert admits the possibility that the committee will soften its bias toward tightening and revising the wording of its policy. In his opinion, the thesis that further harsh measures would have been required if there had been evidence of more persistent inflationary pressures would no longer be used.

Goldman expects the first 25 basis point interest rates cut in the United Kingdom to occur in May of the current year. After that, according to experts, there will be further increments by a quarter point at each meeting until the bank rate reaches 3% in May 2025.

JPMorgan UK economist Allan Monks expects the Monetary Policy Committee on Thursday to hint at a potential softening of its approach around the summer. The expert believes that the relevant decisions will not be made before August.

In a research note last week, Allan Monks noted that the Bank of England will not eliminate the very possibility of an interest rate cut in May, but will indicate a priority to abandon early measures. According to the expert, the updated report of the financial regulator of the United Kingdom is likely to contain a statement that clear progress has been made concerning inflation, but it is too early to state victory, which is why caution should be exercised while thinking about when and how monetary policy can be normalized.

JPMorgan expects that there will be no votes for an interest rate hike at the Bank of England meeting on Thursday. The experts of this financial institution predict a unanimous decision to keep the mentioned indicator at the current level. Allan Monks noted that the Monetary Policy Committee’s vote is not a formal guidance, there is often a fair degree of weight placed on its change from one meeting to the next. The expert also said that one dovish disagreement should not be interpreted as a reliable guideline regarding the position of the rest of the committee and the prospects for an earlier interest rate cut.

As we have reported earlier, Bank of England Says About Impact of Quantum Computers on Financial Markets.

Serhii Mikhailov

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Serhii’s track record of study and work spans six years at the Faculty of Philology and eight years in the media, during which he has developed a deep understanding of various aspects of the industry and honed his writing skills; his areas of expertise include fintech, payments, cryptocurrency, and financial services, and he is constantly keeping a close eye on the latest developments and innovations in these fields, as he believes that they will have a significant impact on the future direction of the economy as a whole.