A passageway near the Bank of England (BOE) in the City of London, United Kingdom, on Thursday March 18, 2021.
Hollie Adams | Bloomberg | Getty Images
LONDON – The Bank of England is almost certain to leave its key interest rate unchanged at 5.25% for the third day in a row on Thursday, but economists are divided over when to expect the first rate cut next year.
According to LSEG, the market expects a near 100 percent chance of a hold on Thursday as economic data has proven largely inconclusive since the bank’s last meeting.
Real GDP was flat in the third quarter, in line with Monetary Policy Committee forecasts, while both inflation and wage growth fell short of expectations and domestic demand was weak. Headline inflation in the UK fell to an annual 4.6% in October, its lowest level in two years.
The latest labor market data on Tuesday suggested a continuation of recent trends: Unemployment remained largely unchanged and job vacancies continued to decline rapidly.
“This fits with the hypothesis of some Federal Reserve officials that with vacancies so high, it might be possible to create a lull in the labor market without significantly increasing unemployment,” PwC economist Jake Finney said in an E on Tuesday -Mail.
Average wages including bonuses fell 1.6% between September and October, compared with an average monthly growth rate of 1.1% in the first half.
Finney noted that real inflation-adjusted wages are still rising due to a sharp year-over-year decline in headline inflation, suggesting that the average household is emerging from the country’s worst cost-of-living crisis.
Signs of a slowdown in the labor market would give the MPC some reassurance ahead of Thursday’s meeting, Finney said, particularly given the lack of major surprises in economic data last month.
New figures showed on Wednesday that the U.K.’s GDP contracted 0.3% in October, well below the flat rate expected by economists polled by Reuters and wiping out the 0.2% growth recorded in September.
Several analysts then suggested that the negative growth numbers would solidify Thursday’s expected interest rate hold but could increase the likelihood of earlier rate cuts in 2024 as the bank tries to avoid plunging the economy into recession.
Rhetoric to remain combative
With this in mind, Barclays expects the MPC to cast a split vote for a suspension but maintain its rhetoric while resisting market pricing for “early” cuts. Barclays does not expect interest rates to fall until August 2024.
The bank’s economists Abbas Khan and Jack Meaning said they expect the MPC to continue to indicate that its current monetary policy stance is “restrictive” and that signs of its impact on activity and the labor market are improving pile up.
“An unchanged forward-looking forecast will also serve the MPC well to address current market pricing of the key rate, which makes cuts increasingly likely in the first half of 2024,” they said.
“We continue to expect the rate cutting cycle to begin in August 2024 and a final policy rate of 3.25% by the second quarter of 2025.”
Khan and Meaning added that a reassessment of the timing and size of interest rate cuts by the US Federal Reserve and the European Central Bank, both of which are also set to announce policy decisions this week, could put pressure on the MPC to start cutting interest rates sooner to begin Sterling should rise sharply, causing inflation to fall sooner or further below the Bank’s target of 2%.
“However, given the timing of data cycles, the level of inflation, particularly in the services sector, and the year-on-year wage growth rate, we believe it is unlikely that the MPC will reverse in the first half of 2024, and almost certainly not before May,” they added.
No change in narrative
Both the Fed and the ECB saw their hawkish stance tempered by dovish interventions from key voting committee members – Christopher Waller in the US and Isabel Schnabel in Europe.
In contrast, the Bank of England’s centrist policymakers, such as Governor Andrew Bailey and chief economist Huw Pill, have repeatedly stressed that it is too early to talk about cuts, while more hawkish members have raised further concerns about the possible persistence of inflationary pressures.
“While current market prices are not too far from our policy rate forecast – first cut in June and 100 basis point cuts over the course of 2024 – our view at this point is that the BoE wants to prevent financial conditions from deteriorating Ease too soon and too much,” BNP said Paribas European economists Paul Hollingsworth and Matthew Swannell said in a research note last week.
The French bank expects the Bank of England to reiterate the need to remain in restrictive territory on Thursday. However, as there will be no press conference or updated forecasts, this will need to be reflected through the voting breakdown, guidance and any post-meeting communications.
“Ultimately, however, we expect both growth and inflation to be weaker than the BoE forecasts for the first half of 2024, leading to an initial cut in June 2024 and an increase in the key interest rate to 4.25% by Hollingsworth and Swannell added.
Source : www.cnbc.com