BoE Kept Rates Unchanged but Revised Inflation Outlook Delays Cuts

BoE Stands Pat (Vote Split: 2 Hike, 6 Hold, 1 Cut)

• BoE keeps rates unchanged – MPC casts first vote for a rate cut but two hawks hold firm, voting for another hike
• BoE forecast sees inflation fast approaching target only to turn higher until 2026 – dampening optimism
• GBP, 2-year Gilt yield and the FTSE perk up after the announcement

MPC Casts First Vote to Cut but Two Hawks Hold Firm on Another Hike

The BoE held the UK benchmark rate steady but interestingly enough the Monetary Policy Committee, the bank’s decision-making body, appears more divided than before. Six members voted to maintain rates as is but two held out for another hike; and the well-known dovish member, Swati Dhingra voted in favour of a first rate cut for the Bank of England.

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Resurgent Inflation Forecast Taps the Brakes on Rate Cut Expectations

One of the most shocking revelations of the monetary policy report was the forecast for inflation to drop to target in Q2 this year, which implies phenomenal progress when compared to the November figures which estimated only reaching the 2% target at the end of 2025.

This you would think is great news if the Bank of England didn’t expect inflation to re-emerge with momentum, rising away from the target until the end of 2026.

One of the more closely observed indicators of the Bank’s medium term inflation outlook is the 2-year CPI forecast which rose notably to 2.3% from November’s estimate of 1.9% – further highlighting the risk of a second wave of inflation.

The Three Conditions for Rate Cuts Make Progress

The Bank of England has often referred to the labour market, private wage growth and general services inflation when responding to the likelihood of interest rate cuts. The end of year dip in services inflation is expected to rise to 6.6% before falling towards 5% in Q2.

Wage growth however, is expected to continue to make progress, dropping to 4% and the end of this year compared to the November forecast of 4.25%. The Bank anticipate that unemployment will ease but at a slower pace than anticipated.

Sterling, 2-Year Gilt Yield and the FTSE Perk up After the Announcement

Sterling picked up a bid on the news as markets eased expectations of rate cuts. The 2-year Gilt yield rose in kind, while the FTSE 100 also partook in the post-MPC advance.

Multi asset reaction to the news

Source: TradingView, prepared by Richard Snow

— Written by Richard Snow for DailyFX.com

Contact and follow Richard on Twitter: @RichardSnowFX