BoE to cut rates soon?

The Bank of England MPC left interest rates on hold at 5.25% yesterday though two of the nine members voted for an immediate quarter-point reduction, while BoE Governor Andrew Bailey opened the door to a possible (but not certain) cut in June. Sterling fell initially against the dollar and the euro, but has since more than recovered against the former to around $1.2540 and is marginally firmer against the latter trading just below 86p, with stronger than expected  UK first quarter GDP data released earlier this morning helping to underpin the pound. The euro has also gained ground against the dollar to trade at around $1.0780, with some softer than expected US labour market data yesterday weighing on the dollar.

UK shorter-dated government bond yields edged down following the BoE meeting as rate cut expectations hardened – the market sees a bit more than a 50/50 chance of a 25bps cut in June and is fully priced for such a move in August – with 2-year yields closing around 5bps lower. US yields also ended marginally lower, while German yields finished flat to slightly higher on the day.

After leaving interest rates unchanged, the Bank of England MPC said “the current restrictive stance of monetary policy is weighing on economic activity, is leading to a looser labour market and is bearing down on inflationary pressures.” With inflation expected to fall further, BoE Governor Bailey said it is likely the MPC will have to cut interest rates to make policy less restrictive, and indicated a cut could come at the next meeting in June although it is not “a fait accompli.”

The UK economy rebounded more strongly than expected in the first quarter of this year with GDP increasing by 0.6% on the quarter – ahead of the consensus forecast of 0.4% –  having fallen by 0.3% in Q4 2023,  while the year-over-year rate of growth returned to positive territory at 0.2%. The economy also ended the first quarter on a strong note, with GDP increasing by 0.4% in March following a 0.2% gain in February.

It is relatively quiet for the rest of the day economic data-wise with consumer confidence/inflation expectations in the US the only release note, though there are a number of Fed/ECB/BoE members scheduled to speak over the course of the day.