BoE likely to cut its inflation projections

The Bank of England will leave the Bank Rate unchanged at 5.25% at its monetary policy meeting on May 9. The voting split is likely to stay at 8 to 1 in favor of keeping interest rates unchanged and we expect Swati Dhingra to be the single member voting in favor of reducing the Bank Rate by 25bp. The recent comments by BoE Chef Economist Huw Pill suggest that the BoE will keep rates higher for longer rather than cut ting them too soon. Meanwhile, BoE Deputy Governor Dave Ramsden sounded less worried about inflation and more confident about domestic pressures “receding” (more than as indicated by the BoE forecasts in February). Also, BoE governor Andrew Bailey said that UK inflation was slowing largely and that the dynamics for inflation were different between Europe and the US (more demand-driven inflation in the US), suggesting that the BoE will not hesitate to cut before the Fed. Still, we expect both Ramsden and Bailey to vote in favor of unchanged policy at the May MPC meeting, as they will want to see more data to be confident of the strength of the disinflation process. External members remain rather cautious with Jonathan Haskel saying that rate cuts should be “a long way off” given an “extremely tight” labour market and Megan Greene seeing wage growth too high for reaching the BoE’s 2% target. Yet, market rate cut bets appear too conservative and so the BoE is likely to send a dovish signal to prepare investors for looming rate cuts. Also, we expect t he MPC to show a decline of the inflation projections in three years’ time, to s ignal the necessity of an eventual easing in monetary policy. We expect a first rate cut by 25bp in August this year.