Bank of England Votes 7-2 to Hold Rates

The Bank of England added another vote in the ‘cut’ camp as Dave Ramsden joined Swati Dhingra in calling for a rate cut on Thursday. Before the media blackout period, Ramsden communicated optimism around inflation hitting the 2% target and remaining there for an extended period. His comments contrasted with the February staff forecasts which saw inflation plummeting to the 2% target but then rising above for an extended period.

The medium-term inflation projection (i.e. two years ahead) came in under the 2% mark at 1.9% to provide even greater confidence that the Bank is making progress in the battle against inflation.

Cross-Market Reaction (5-Minute Charts)

Cable was seen lower in the moments following the announcement with commentary from BoE Governor, Andrew Bailey due at 12:30 UK time. EUR/GBP also witnessed a bid while the FTSE was only moderately improved on what has been an impressive move higher in recent trading days.

Source: TradingView, prepared by Richard Snow

Implied Basis Points into the end of the Year

Markets now imply a 44% chance of a rate cut in June with a cut fully priced in by the end of the August meeting.

Source: Refinitiv, prepared by Richard Snow

Lingering Concerns Over Services Inflation Remain

With forecasts suggesting inflation will speedily move towards the 2% target and growth remaining subdued, it may seem a mystery why there isn’t more of a motivation to cut interest rates.

The quick answer is that services inflation is still a problem for the committee as it remains elevated, at 6% (yellow line). Wage growth, the grey line, (average earnings including bonuses on a rolling 3-month basis) has moderated to a more tolerable 5.6% but has also attracted the attention of the BoE in recent meetings and the committee will be looking for further progress in the data on Tuesday next week.

Source: Refinitiv, prepared by Richard Snow

In the lead up to the announcement sterling weakened against the US dollar and was generally trading lower against a basket of G7 currencies. The weaker pound naturally buoyed the FTSE index, which has enjoyed an extended period of gains, ultimately seeing it reach a new all-time high.

Cable had been hovering around that 1.2500 level ahead of the meeting as market participants wait for directional clues from the BoE. The pair broke down after trading within a broad range for most of the first quarter which extended into April too. With the Fed in no position to cut rates, focus turns to other major central banks like the BoE to gauge how soon they will be in a position to realistically lower the interest rate. When other central banks are likely to cut, interest rate differentials are likely to help steer FX markets, with cable likely to experience further softening when the Bank communicates a greater urgency to lower rates but this effect may be marginal seeing how closely aligned UK-US rates are currently.

GBP/USD Daily Chart

Source: TradingView, prepared by Richard Snow

The FTSE has enjoyed a period of positive performance and continues to trade well within overbought territory. The current trend reveals few, if any, signs of a slowdown.

FTSE Daily Chart

Source: TradingView, prepared by Richard Snow

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