Bank of England Governor Andrew Bailey attends the central bank's Monetary Policy Report press conference at the Bank of England in London on May 9, 2024. The Bank of England kept its key interest rate at a 16-year high on Thursday, but hinted that inflation in Britain will fall further this summer and the country appears to be leaving the recession behind. (Photo by Yui Mok / POOL / AFP) (Photo by YUI MOK/POOL/AFP via Getty Images)
Yui Mug | Episode | Getty Images
LONDON – A slew of comments from the Bank of England and better-than-expected economic growth have left traders and investors refining their expectations about when Britain's central bank will start cutting interest rates.
Investors had been eagerly awaiting any indicators, hoping they would provide clues as to when the cuts could begin. The BOE's benchmark interest rate helps price all types of loans and mortgages in the country and has risen rapidly in recent years to help curb high inflation.
According to LSEG data, markets on Friday were pricing in about a 48% chance of a rate cut in June, slightly higher than Thursday's 45% probability.
Economists at Swiss bank UBS were among those who changed their views on when the BOE might cut rates, saying they now expected the first rate cut to come in June instead of August.
“The MPC's broader message and tone were more forgiving than we expected,” they said in a note published after the BOE's latest interest rate decision.
The central bank said on Thursday it would leave interest rates unchanged for the time being, stressing that a rate cut in June was in no way guaranteed. Two members of the Monetary Policy Committee voted in favor of a rate cut, one more than at the central bank's previous meeting.
“June is not a fait accompli, but each meeting is a new decision,” BOE Governor Andrew Bailey said at a news conference after the meeting.
UBS cited changes in the BOE's forward guidance, inflation expectations and comments from Bailey on the impact of higher national living wages on overall wage growth as reasons for their change in expectations.
The Swiss bank now expects interest rates to be cut by 25 basis points each in June, August and November.
The BOE's interest rate decision was followed on Friday by the latest UK gross domestic product data, which showed the UK economy grew more than expected in the first quarter of 2024.
GDP rose 0.6% compared to the estimate of 0.4%, marking the first quarter since the end of 2021 with GDP growth above 0.5%.
This brought the economy out of the technical recession it had entered after two consecutive quarters of contraction in the second half of last year.
“This is undeniably a strong figure and suggests the UK economy is shaking off the woes of 2023,” Nomura analysts said in a note published on Friday. This could indicate that inflationary pressures persist and that the economy is more resilient to higher interest rates, they noted.
The BOE warned Thursday that indicators of persistent inflation “remain high,” but also said it expects inflation to approach the 2% target in the near term.
“This [GDP] The publication reinforces our view that the Bank of England will have to keep policy restrictive for longer than markets estimate to bring down inflation,” analysts said. They added that they expected the central bank to wait until August before cutting rates.