MNI BOE WATCH: Holds In May, Takes Another Step Towards Cut

The Bank of England held its key policy rate at 5.25% at its May meeting but took another step towards a cut, with two votes for a 25-basis-point reduction and a lower inflation profile in the central projection of its Monetary Policy Report.

Deputy Governor Dave Ramsden, who had shifted to a dovish position in a recent speech and has previously been a bellwether of coming changes in stance by the Monetary Policy Committee, joined external member Swati Dhingra in voting for a cut. Governor Andrew Bailey at the press conference said that a cut in Bank Rate in June was "neither ruled out nor a fait accompli", but added that it was likely that a rate reduction would be needed in coming quarters. (See MNI POLICY: BOE's New Dove Ramsden Often Leading Indicator)

Bailey went on to say that the MPC may cut by more than currently priced into the market rate path. The Committee's forecast, conditioned on the market path, showed inflation dropping just below the 2.0% target to 1.9% in two years then falling further to 1.6% three years out. This would imply that the rate path showing Bank Rate only reaching 4.5% by Q2 2025 and 3.7% three years ahead is too high.

VOLATILE U.S. RATES

Market curves have been driven to some degree by the volatile U.S. rates, with the Fed shifting from pointing to a near-term cut to maintaining a high-for-long stance.

Bailey put distance between the BOE and the Fed, saying that UK inflation dynamics are different from U.S. ones and that "there is no law that says the Fed must move first and everyone else, including us, moves afterwards."

The no-change camp is far from unified. May’s MPC minutes stated that there was a range of views about how much evidence was likely to be needed to justify a rate cut and to what degree upcoming data was likely to alter the view of those calling for a hold. (see MNI POLICY: BOE Split Over Measures Of Inflation Persistence)

When the first rate reduction comes, it looks likely to be on a split vote, with members such as Catherine Mann and Megan Greene having previously stated that they are not contemplating a near-term cut.

The MPC stuck to its collective guidance that monetary policy "will need to remain restrictive for sufficiently long" to get inflation back to target, but the minutes made clear that this was not a block to a rate cut, stating that policy "could remain restrictive even in Bank Rate were to be reduced."