There are plenty of mixed opinions about how the bank rate vote is going to pan out but one thing is for sure. That is the BOE is not going to make any changes to the bank rate today. It will remain at 5.25% as policymakers continue to deliberate their next steps. So, let’s take a look at what that might be.
As things stand, the first rate cut priced in by markets is for June this year. That said, the odds of a May rate cut are at ~69% currently. So, that means a move then is not completely off the table either.
Including today, the BOE has three more policy meetings to really communicate a pivot. However, they are not likely to do that today and it would be prudent for them to maintain a more data-dependent approach for now.
The two main things that the BOE is concerned with right now are inflation and the UK economy.
On the inflation front, the latest report in December here was less encouraging for the BOE. Services inflation in particular remains sticky and core annual inflation is still above 5%. That is not quite a development that warrants any urgency to pivot towards easing monetary policy.
As for the UK economy, there has been much resilience in Q4 last year and that seems to have continued to January this year as well. The stronger performance of the services sector has been a welcome development for the BOE, allowing them to keep rates higher for longer essentially.
So, what does that all mean for today?
Putting everything together, it just means that the BOE will be right to stick to the status quo. The bank rate vote today might still reflect one or two hawkish dissents. However, this is one of the closer meetings in which we could get a unanimous 9-0 vote. At the same time though, do be mindful that Dhingra – the most dovish member – might vote to cut by 25 bps already.
The rest of it will come down to the BOE’s statement language for the most part. They should reiterate being data-dependent, so that will definitely stick. And the point on policy needing to be “sufficiently restrictive for sufficiently long” should be maintained. However, any subtle changes in the forward guidance will be heavily scrutinised and could be interpreted as a more dovish leaning. That especially if they edit/remove this passage:
“Further tightening in monetary policy would be
required if there were evidence of more persistent inflationary pressures.”
If so, that will severely limit sterling’s potential moving forward. In the case of GBP/USD, it means that the ceiling of the recent consolidation range of 1.2600 to 1.2800 will be reinforced.