UK: Bank of England to drop tightening bias but remain cautious on rate cuts
The Bank of England was careful not say anything at the December meeting that could be misconstrued as an endorsement of market pricing on rate cuts. Investors are currently pricing roughly 100bp of cuts this year. But the reality is that defending a “higher for longer” stance on interest rates is getting harder to defend as the inflation backdrop shows signs of improving.
Both services inflation and private-sector wage growth, the two variables guiding BoE policy right now, are well below the Bank’s November projections. Even so, we expect the Bank will still want to tread carefully. Lower market rates will at least offset the recent improvement in inflation and it’s possible the BoE’s two year-ahead forecast will be a little above 2%.
What really matters for markets though are what the Bank does to its policy statement. We suspect it will drop the suggestion that it could raise rates further, but keep the signal that rates need to stay restrictive for an extended period. As for the vote split, we suspect the hawks will finally throw in the towel and stop voting for a rate hike. At the same time, we think it’s probably too early to see the doves voting for a cut. That leads us to expect a unanimous decision to keep rates on hold.