Bank of England expected to hold rates as inflation persists
The Bank of England is widely expected to hold interest rates steady at 4.5 per cent this week as wage growth and inflation data remains sticky.
Most analysts are expecting a seven to two vote in favour of a hold from the Bank’s Monetary Policy Committee, with external members Swati Dhingra and Catherine Mann voting for a 25 basis point cut.
There is a 95 per cent chance of a rate hold from the Bank according to interest rate swaps, with a 77 per cent chance of a cut at the central bank’s meeting in May.
However, markets are currently split evenly on whether a cut will be made in August. In total, they are expecting rates to fall by 0.5 per cent throughout 2025.
“A gradual and careful approach, in our view, leans against the need for back-to-back rate cuts – especially with headline CPI on the rise,” said Deutsche Bank’ chief UK economist Sanjay Raja.
The Bank of England’s previous meeting
Last month, the Bank’s MPC voted to cut interest rates by 0.25 per cent, though two members surprisingly voted to cut them by 0.5 per cent.
The one phrase that drew attention of markets in the February meeting was that the Bank pledged a “careful approach” to further easing of interest rates, suggesting a slower rate of cuts should be expected.
“There’s little that’s happened since the February meeting that will have caused officials to shift their position,” added ING developed markets economist James Smith.
Key economic data released since the meeting revealed that inflation rose by three per cent in January, above the Bank’s previous projections, while wage growth sits at six per cent and services inflation is at five per cent.
“With CPI inflation uncomfortably above the Bank’s target, the Bank seems to be taking a cautious approach to policy setting, even though it views many of the drivers of short-term inflation as temporary in nature,” explained Ranjiv Mann, portfolio manager at AllianzGI.
“Underlying services has inflation softened, providing some comfort to policymakers, although companies are passing on rising costs from tax hikes and the disruption of global supply chains coming from growing trade uncertainty,” he added.
While fears of a downturn in the jobs market have spread throughout the City, with numerous surveys pointing to weaker hiring intentions, the negativity hasn’t yet shown up in hard data.
“Companies are required to report redundancies to the government via an HR1 notification,” said ING’s Smith. “These haven’t shown any discernible uptick so far.”
Raja also noted that labour market indicators have shown some signs of stabilisation since the February decision, which reduces the need for a faster dial down of restrictive policy at this stage.
“Given the broad consensus for a ‘careful’ approach to removing policy restraint, we expect the MPC to be in no rush to cut rates,” he added.