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VIEW CHANGE: Barclays looks for higher terminal rate with shallower cutting cycle

BOE
  • Barclays continues to look for the first 25bp cut in June followed by sequential 25bp cuts in August, September and November but then looks for cuts at a quarterly pace in February 2025 and May 2025 to a terminal 3.75%. Previously it looked for sequential 25bp cuts between June 2024 and May 2025 to a terminal 3.25% (so it has removed cuts at the Dec24 and Mar25 meetings).
  • Barclays notes that this week's data "does not represent as much news relative to the Monetary Policy Committee's (MPC) last Monetary Policy Report (MPR) forecast."
  • Regarding the first cut in June, Barcalys' forecasts "CPI inflation will be below 2% (1.8% for May 2024), core inflation will be 3.1% and services inflation will have dropped from its current 6.0% to 4.8%. We judge that this will be sufficient progress made for at least 4 MPC members to join Swati Dhingra in voting for a 25bp cut to Bank Rate."
  • However, Barclays also notes that there are risks that the first cut is delayed "Should the inflation and wage prints in the next two releases come in stronger than our, and the Bank of England's expectations."
  • "To close [the output] gap by the end of the forecast and bring the economy into balance, the lags inherent in transmission imply a forward-looking MPC member would need to bring Bank Rate to neutral in the next 12-18 months."
  • "In February, the MPC put a numerical estimate on exactly how restrictive it believes policy currently is: between 75 and 150bp... Based on that estimate, the MPC could have confidence that it could carry out 100bp of cuts without policy becoming overly easy and reigniting further inflation."
  • "Having reduced the degree of restrictiveness significantly, but with uncertainty around exactly where r* is, we expect the MPC to pause in December after the first 100bp of cuts and begin to move more slowly, at a quarterly frequency, cutting 25bp in February 2025 and May 2025, assessing conditions as it goes."
  • Barclays is the seventh sellside bank that we have seen change their BOE forecast this week (with GS also changing their call last week). We summarise the earlier call changes in the MNI UK Inflation and Labour Market Insight here.
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