Introduction: It’s Bank of England day
Good morning, and welcome to our rolling coverage of business, the financial markets and the world economy.
It’s a busy day for central bankers, with the Bank of England expected to leave UK interest rates at a 16-year high at noon.
Despite inflation dropping to a two-and-a-half year low on Wednesday, economists predict BoE policymakers will choose to leave Bank Rate at its current level, 5.25%.
That would fail to bring any relief to UK borrowers, and maintain the pressure on the economy from higher borrowing costs.
According to the money markets this morning, ‘no change’ is a 95% while there’s just a 5% possibility of a quarter-point cut (lowering rates to 5%).
The Bank has been clear in recent weeks that it wants to see further evidence that inflationary pressures are falling’; economists will scrutinise the minutes of this week’s meeting for any hints as to how long policy should remain restrictive.
At last month’s meeting, the Bank’s nine policymakers split three ways – six voted to hold rate, two wanted a rise, and one a cut. That split could change today, as the monetary policy committee weighs up the risks of tightening for too long, versus easing too early.
The Bank will surely have appreciated yesterday’s drop in CPI inflation to 3.4%, neared to its 2% target. But it will also have noted that services inflation – a guide to domestic inflationary pressures – was 6.1%. That could be too high for comfort, for the BoE.
The MPC will also want to see signs that wage pressures are easing – as George Buckley, economist at Nomura, explains:
Annual rates of inflation are likely to fall further over the course of 2024, and pay settlements are running at a slower pace according to XpertHR data.
But calculations of price “momentum” suggest we’re not quite at the settling point we need to be for the annual rate of inflation to migrate all the way back to its target. The stronger services [inflation] print in particular provides some comfort for our view that the Bank will only cut rates from August this year, while weaker pay settlements raise the risk of an earlier move relative to our forecast.
Not cutting has its risks, though. Monetary policy operates with a lag – meaning interest rate changes are like turning the rudder on a supertanker, not the steering wheel of a racing car.
Last month, the Bank’s former chief economist, Andy Haldane, warned that keeping rates high could ‘crush the economy’
Haldane’s successor, Huw Pill, has likened the Bank’s challenge to a trip on Table Mountain. Rates may have reached their highest levels, but there’s more of a plateau to travel before they start falling….
The agenda
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7am GMT: UK public finances
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8am GMT: Taiwan’s interest rate decision
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8.30am GMT: Switzerland’s interest rate decision
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9am GMT: Norway’s interest rate decision
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9am GMT: Eurozone ‘flash’ PMI survey of business activity for March
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9.30am GMT: UK ‘flash’ PMI survey of business activity for March
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Noon GMT: Bank of England interest rate decision
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12.30pm GMT: US weekly jobless figures
Key events
Stock markets are in a buoyant mood today after America’s central bank stuck with its forecast that US interest rates will be lowered by three-quarters of a percentage point this year.
Last night, the Federal Reserve left interest rates on hold, but also signalled that it still expects to cut rates three times this year.
That cheered Wall Street, driving the Dow Jones industrial average up by 1% last night. And today, Japan’s Nikkei index has jumped 2% to a new alltime closing high.
Deutsche Bank expect very few changes from the Bank of England today.
Their chief UK economist, Sanjay Raja, expects the MPC to stick to its February guidance that Bank Rate is restrictive and “will need to remain restrictive for sufficiently long to return inflation to the 2% target”.
But… he identifies three areas where the Bank could surprise us today:
The vote tally. After a three-way 2-6-1 split in February, we think the committee will be less divided in March following recent economic news. Given weaker growth, weaker inflation, and weaker pay data, we think an 8-1 vote tally now looks more likely (with external MPC member Dhingra voting for a rate cut).
A dovish surprise on the forward guidance? While we expect the MPC to stick to its recently refreshed forward guidance, we see dovish risks, too. Indeed, inflation has inched lower than the Bank projected in February. Private sector pay growth has also pushed lower than the Bank’s forecast for Q1-24, with pay deals softening in the last month or so.
What kind of risk could we see? A further shift in the forward guidance, with the MPC acknowledging that a change in Bank Rate may be warranted in order for monetary policy to maintain an appropriate degree of restrictiveness. The MPC could also reiterate its view more that rate cuts would still leave Bank Rate in restrictive territory, raising the likelihood for a spring rate cut.
Jefferies: Expect rate cuts by August
If not now, then when?
Many City analysts predict the Bank of England will start cutting rates by this summer, when inflation coud have dropped all the way back to its 2% target.
Modupe Adegbembo, economist at Jefferies, explains:
We expect the MPC to keep rates on hold at 5.25% [today] and think the BoE is likely to begin cutting in August, though cuts could plausibly come earlier if wages fall back faster than anticipated.
Given the resilience of the economy, we think the BoE will cut rates steadily, penciling in 75bp of hikes across this year leaving Bank Rate at 4.50% by end-2024.
Introduction: It’s Bank of England day
Good morning, and welcome to our rolling coverage of business, the financial markets and the world economy.
It’s a busy day for central bankers, with the Bank of England expected to leave UK interest rates at a 16-year high at noon.
Despite inflation dropping to a two-and-a-half year low on Wednesday, economists predict BoE policymakers will choose to leave Bank Rate at its current level, 5.25%.
That would fail to bring any relief to UK borrowers, and maintain the pressure on the economy from higher borrowing costs.
According to the money markets this morning, ‘no change’ is a 95% while there’s just a 5% possibility of a quarter-point cut (lowering rates to 5%).
The Bank has been clear in recent weeks that it wants to see further evidence that inflationary pressures are falling’; economists will scrutinise the minutes of this week’s meeting for any hints as to how long policy should remain restrictive.
At last month’s meeting, the Bank’s nine policymakers split three ways – six voted to hold rate, two wanted a rise, and one a cut. That split could change today, as the monetary policy committee weighs up the risks of tightening for too long, versus easing too early.
The Bank will surely have appreciated yesterday’s drop in CPI inflation to 3.4%, neared to its 2% target. But it will also have noted that services inflation – a guide to domestic inflationary pressures – was 6.1%. That could be too high for comfort, for the BoE.
The MPC will also want to see signs that wage pressures are easing – as George Buckley, economist at Nomura, explains:
Annual rates of inflation are likely to fall further over the course of 2024, and pay settlements are running at a slower pace according to XpertHR data.
But calculations of price “momentum” suggest we’re not quite at the settling point we need to be for the annual rate of inflation to migrate all the way back to its target. The stronger services [inflation] print in particular provides some comfort for our view that the Bank will only cut rates from August this year, while weaker pay settlements raise the risk of an earlier move relative to our forecast.
Not cutting has its risks, though. Monetary policy operates with a lag – meaning interest rate changes are like turning the rudder on a supertanker, not the steering wheel of a racing car.
Last month, the Bank’s former chief economist, Andy Haldane, warned that keeping rates high could ‘crush the economy’
Haldane’s successor, Huw Pill, has likened the Bank’s challenge to a trip on Table Mountain. Rates may have reached their highest levels, but there’s more of a plateau to travel before they start falling….
The agenda
-
7am GMT: UK public finances
-
8am GMT: Taiwan’s interest rate decision
-
8.30am GMT: Switzerland’s interest rate decision
-
9am GMT: Norway’s interest rate decision
-
9am GMT: Eurozone ‘flash’ PMI survey of business activity for March
-
9.30am GMT: UK ‘flash’ PMI survey of business activity for March
-
Noon GMT: Bank of England interest rate decision
-
12.30pm GMT: US weekly jobless figures