BoE preview: a pause ahead of cautious cuts

We expect most MPC members to back status quo next week . Two MPC members who voted to cut rate s of a larger magnitude in February, Catherine Mann and Dhingra Swati, will likely advocate a quarter point cut on March 20, but the remaining MPC members are more likely to take a wait and see stance this month . Overall, recent data suggests interest rates to stay on hold next week. A reacceleration of inflation to 3% in January and a pick-up in pay growth to 6% in Q4 do not warrant a cut as soon as this month, especially as the UK economy grew stronger (+0.1% QoQ) than expected (-0.1% QoQ) in the final quarter of last year. In contrast, deteriorating sentiment points to the gloomy outlook for UK business investment and employment ahead. Yet, t he pace at which the rates can go down has be come less certain , given that MPC members seem to be divided now with some favoring a “gradual and careful” approach to cutting interest rates , while others preferring a “cautious and gradua l” attitude . A divide among MPC members has emerged amid economic weakness after the BoE halved its growth projection to 0.75% for this year. A c autious- careful debate might indicate disagreements on the next steps and timing of future rate moves , possibly leading to fewer than more cuts. Still , w e maintain our call of three more cuts this year , at each forecast meeting, as the temporary pick-up in inflation is less likely to create second round effects , as assessed by the governor Andrew Bailey. We think that higher costs on employers are more likely to undermine employment, pay settlement and profit margins in the period ahead . Yet should the pay growth remain noticeably elevated in coming months (not least due to higher minimum wage), we might need to change our call to fewer cuts.