Bank of England Preview: Will Updated Projections Show More Cuts Are Expected in 2024?

Current Rate Expectations

The Bank of England (BoE) is anticipated to maintain its interest rate at 5.25% during its upcoming meeting on February 1, 2024. Market data indicates a 97% probability of this decision. Despite the BoE's previous resistance to discussing rate cuts, there is growing pressure for clarity on future monetary policy.

Market Sentiment and Inflation Trends

While the BoE has consistently pushed back against the idea of rate cuts, market expectations are pricing in a total of 100 basis points (bps) in cuts for 2024, suggesting four 25bps reductions between June and December. The recent rise in consumer prices has tempered expectations for a cut in the first half of the year, with the likelihood of a March cut now at just 16%.

Despite inflation rising in December, the annual rate has significantly decreased from a peak of 11.1% at the end of 2022, indicating that the restrictive monetary policy has effectively curtailed spending and financing. However, concerns are mounting regarding the sustainability of the UK economy under high interest rates, as both business investment and consumer spending have contracted recently.

Global Monetary Policy Context

The Federal Reserve's upcoming meeting may influence the BoE's stance, especially following comments from ECB President Christine Lagarde, which hinted at a potential shift in the ECB's policy. Lagarde's avoidance of strong hawkish language has led markets to speculate that rate cuts could be on the horizon.

Governor Andrew Bailey's previous lack of forward guidance during the BoE's December meeting suggests a similar approach may be taken this time. However, with increasing economic pressure, he may feel compelled to provide more insight into potential rate cuts.

Importance of Vote Split and Projections

The voting dynamics within the Monetary Policy Committee (MPC) will be crucial. In December, three members voted for a rate hike, but this meeting could see all nine members voting to keep rates unchanged for the first time since September 2021. Any dissenting votes for a rate cut could signal a shift in policy direction.

Traders will be particularly attentive to updated inflation projections. In November, the BoE forecasted headline inflation to drop to 3.1% by the end of 2024. Any upward revision in these figures could undermine rate cut expectations. The previous projections indicated only one 25bps cut for 2024, and while more cuts could be anticipated, it seems unlikely the BoE will align with the market's expectation of four cuts just yet.

Market Reactions and GBP/USD Analysis

The GBP/USD exchange rate rose over 1% following the December meeting, reflecting the BoE's hawkish stance. However, the pair has since struggled to maintain upward momentum, trading sideways and facing resistance between 1.2790 and 1.2830. The recent flattening of the RSI suggests a lack of new buying interest, indicating a potential downward trend in the short term.

The outcome of the Fed's meeting will likely influence market perceptions of monetary policy, impacting GBP and UK stock valuations.