Bank of England: A Spring Cut is Likely, But Will It Come in March or April?

Key Takeaways

• Service price inflation keeps the governor on edge.
• Hawks stick to their guns regarding inflation concerns.
• Governor Andrew Bailey may wait to vote for a cut in April.
• The Treasury Select Committee hearing increases tension before the March meeting.

Current Economic Context

After a close decision not to cut rates at the February meeting, there were high hopes for a rate cut in March. However, recent comments from Bank of England members, including Governor Andrew Bailey, have cast doubt on the timing and extent of future rate cuts for the year.

Service Price Inflation Concerns

Governor Bailey expressed increased concern over service price inflation, which is currently rising at a 4.4% annual rate and has remained above 4% for nearly four years. This persistent inflation poses a significant hurdle to potential rate cuts, making the March decision more uncertain than previously anticipated.

Hawkish Stance from Committee Members

Committee members Huw Pill and Megan Greene, known for their hawkish views, voiced concerns about inflation and the pace of rate cuts. Pill noted some comfort in stable medium-term inflation expectations, while Greene warned that rapid rate cuts could undermine the BOE's credibility. Slowing the pace of cuts would allow the BOE to respond effectively to any future economic downturns.

Market Reactions and Future Expectations

The Treasury Select Committee hearing was dominated by hawkish sentiments, which may not fully represent the broader rate-setting board. The market reaction was muted, with the interest rate probability market pricing in a 75% chance of a cut next month, a slight decrease from 80%. The likelihood of more aggressive cuts has diminished due to the persistent service price inflation.

Potential Delay in Rate Cuts

If Governor Bailey remains concerned about service price inflation, he may opt to wait until the April BOE meeting to decide on rate cuts. Upcoming increases in household bills and minimum wage could alter consumer behavior and long-term inflation expectations, complicating the decision-making process.

Conclusion

While a spring rate cut remains likely, the recent developments suggest that those anticipating an earlier cut may be disappointed. The upcoming March BOE meeting is expected to be tense, with significant implications for the UK economy.