Image Courtesy : Euro News
The Bank of England (BOE) left interest rates unchanged at 5.25% on Thursday, as expected. However, the central bank's dovish shift and split vote (7-2 in favor of holding) suggest a rate cut could be coming sooner than anticipated, potentially in June. Here's a breakdown of key analyst reactions and market movements:
Interest Rate Cut on the Horizon?
- June Cut in Play: Several analysts like Pantheon Macroeconomics and Capital Economics see a June cut as a strong possibility. The BOE's emphasis on upcoming economic data releases suggests their decision will be data-driven. Soft inflation and wage figures could trigger a June move.
- August More Likely, But June Not Ruled Out: Others like ING believe a June cut is less certain. The bank didn't significantly alter its forward guidance, which previously emphasized keeping rates restrictive for a while. However, Governor Bailey left the door open for a June cut during the press conference.
Impact on UK Economy:
- Homeowners Feel the Pinch: Laura Suter of AJ Bell highlights the negative impact of delayed cuts on mortgage holders. With initial expectations of a May cut revised to August, homeowners face a longer period of high borrowing costs. Even a 25 basis point reduction might not significantly decrease their monthly payments.
- Stifling Recovery?: The Institute of Chartered Accountants believes the BOE's cautious approach could hinder the UK's economic recovery. Suren Thiru, their economics director, argues that inflation has cooled, and keeping rates high for too long could dampen growth.
Market Response:
- Gilt Yields Fall: The market is pricing in a higher likelihood of rate cuts. Gilt yields, which move inversely to bond prices, fell after the announcement. This suggests investors are anticipating lower interest rates in the near future.
- Sterling Dips, Stocks Soar: The British pound (GBP) weakened against the US dollar and euro on expectations of easing monetary policy. Conversely, the FTSE 100 stock market index reached a record high, potentially reflecting investor optimism about a potential economic boost from lower rates.
Divergence from the Fed?
- Closer to ECB, Further from Fed: Vantage analyst Jamie Dutta observes the BOE potentially aligning more with the European Central Bank (ECB), which might be open to rate cuts sooner than the US Federal Reserve.
Overall, the BOE's decision signals a cautious shift towards easing monetary policy. While they kept rates steady this time, the focus on upcoming data and the split vote suggest a rate cut in June is a distinct possibility. The markets reacted by pricing in lower rates, with a weakening pound and a surging stock market.