The BoE said on its Monetary Policy Committee voted 7-2 to keep rates at a 16-year high of 5.25%.MARKET REACTION: FOREX: Sterling fell to $1.2467 from $1.2486 just before the decision and was last down 0.3%. Against the euro, the pound traded at 86.05 pence, compared to 85.96 pence earlier BONDS: British government bond yields fell. The interest-rate sensitive two-year gilt yield was last down 4 basis points at 4.274%. It had traded at 4.326% earlier.Money market prices shows traders attach a roughly 42% chance of a cut in June, down from 45% before the decision. Rates by year-end are seen at 4.64% versus 4.67% earlier. STOCKS: London’s FTSE-100 stock index rallied to a new record high, while the more domestically focused FTSE 250 pushed into positive territory, having traded lower earlier on.COMMENTS:HUSSAIN MEHDI, DIRECTOR, INVESTMENT STRATEGY, HSBC ASSET MANAGEMENT, LONDON:”We believe the BoE is setting the stage for a summer rate cut. Disinflation is progressing and the labour market continues to cool. However, the question is, do they go as soon as next month in line with a likely ECB move, or wait until August?Either way, European rate cuts are coming and we think they are likely to be delivered ahead of the Fed which remains hamstrung by stickier inflation.European monetary policy easing and signs of a cyclical rebound supports the outlook for the region’s equity markets, which have performed well this year and remain attractively valued.”JAMIE DUTTA, MARKET ANALYST, VANTAGE MARKETS, LONDON: “Rate setters now see encouraging news on the path of inflation which has fallen from a peak above 11%, and this has set up a potential June move.” “The bank tweaked its inflation forecasts lower, while also changing its statement language by stating that risks regarding inflation persistence were now receding.” “This change is a big clue that the bank could be intending to cut interest rates next month.””The beginning of policy easing in June is seeing market pricing shift from two rate cuts currently priced in, to three in 2024. The pound has inevitably fallen on the news. Policy divergence with the Fed is increasing, with the Bank of England now potentially more in tune with the ECB.” “We would caution that there are still two sets of inflation and wage data before the next meeting.””April services inflation will be a key focus as it could pose an upside risk to the MPC’s current forecasts. A June rate cut will be dependent on inflation behaving itself and falling closer to the 2% target.”JEREMY BATSTONE-CARR, EUROPEAN STRATEGIST, RAYMOND JAMES INVESTMENT SERVICES, FRANCE”The Bank of England has voted to hold the base rate at 5.25% for the sixth consecutive time, setting expectations that the long-awaited rate cut will come on June 20th. Since the Monetary Policy Committee’s last meeting, headline and core inflation have dipped, with the descending trend expected to continue.””Ahead of June 20th, April’s CPI data on May 22nd is expected to show that price increases have fallen sharply, laying the ground for rate cuts the following month. Although the labour market has shown signs of loosening, providing additional encouragement to the MPC, the possible inflationary consequences of a rate cut remain concerning to some the rate-setters. The Committee thus remains divided on the road ahead, with some finding that the pace of deflation is still too slow for comfort.”PHILIP SHAW, CHIEF ECONOMIST, INVESTEC, LONDON:”The direction of travel is clearly looking towards a cut in rates at some point. It wasn’t a huge surprise that (rate setter Dave) Ramsden voted for a cut given a relatively dovish speech a few weeks ago.””What you have is different members placing emphasis on different things in terms of judging inflation persistence and that makes the committee’s reaction function very difficult to determine and therefore it makes it more difficult still to pinpoint exactly when the first reduction in rates will arrive. “Our view has been that we will get a rate cut in June, and that’s still absolutely feasible. Obviously it will depend on data between now and then but also on whether a sufficient number on the MPC is convinced that inflation persistence is no longer the problem it was.” HUGH GIMBER, GLOBAL MARKET STRATEGIST, J.P. MORGAN ASSET MANAGEMENT, LONDON:”In terms of why the markets reading this is more dovish, the key point is the Bank of England’s own forecasts around inflation have been revised lower.” “So importantly, the Bank conditions their forecasts based on a market implied path of interest rates. But what they’re forecasting is now telling us is that if the markets implied path of rates is correct, they’re going to be below their inflation target in both 2026 and 2027.””Whereas if you rolled back three months, and previously, the Bank of England had that 2026 forecast as above target.””So in simple terms, the main message here is that if the markets pricing for the path of interest rates is correct, that would lead them to a below target outcome for inflation, which I suspect the reading of this report is at the margin dovish. “That being said, I think the main takeaway, is that the bank is very reluctant to commit itself to a policy path. And I think that’s absolutely the right approach.”LINDSAY JAMES, INVESTMENT STRATEGIST, QUILTER INVESTORS, LONDON:”While this feels significant, it is important not to get ahead of ourselves. Markets have been a little giddy in recent quarters about the prospect of interest rate cuts, but that has since faded. While markets have begun to price in rate cuts beginning by the end of the September meeting, the flood gates won’t simply just open. Central banks have a tendency to be fairly conservative in the way they act and thus market expectations for just two rate cuts by year end look reasonable. As a result, any hope from the government that these cuts will help sway the election may be misplaced as the impact will take a while to feed through properly.””Furthermore, while the prospect of lower interest rates has so far done very little for consumers or businesses in 2024. Long term gilt yields, which form the basis of mortgage rates and long-term debt agreements, have risen around 60 bps as markets have priced in higher for longer interest rates in the U.S., with markets sceptical that the Bank of England can diverge significantly from the script that the Federal Reserve are following without triggering a sharp drop in the value of sterling, and with it a further inflationary pulse. Slow and steady will be the order of the day when the time comes for the Bank of England to start cutting.” CHRIS SCICLUNA, HEAD OF RESEARCH, DAIWA CAPITAL MARKETS, LONDON:”It’s in line with our expectation given the restrictive nature of market rates in recent months.””Normally, such an inflation forecast would have triggered a rate cut, but there are concerns about the labour conditions.””By the time we get to June, they will likely have the confidence to pull the trigger on a rate cut. So, they want to see a bit more data.””Our base line is for a June rate cut.” More
