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The Bank of England is expected to keep its policy rate unchanged.
UK Deflationary Pressures Intensify in May.
GBP/USD faces initial upside hurdle at 1.2860.
The Bank of England (BOE) is expected to keep its policy rate unchanged for the seventh consecutive meeting on Thursday, despite recent intensification of deflationary pressures in the UK and speculation of two rate cuts this year.
The BoE is widely expected to keep its base rate at 5.25% after its policy meeting on Thursday. In addition to the rate announcement, the central bank will also publish the Minutes of Monetary Policy.
Despite the continued deflationary pressures in May, the BoE seems ready to start cutting its policy rate at some point in the fourth quarter in response to still-high services inflation (+5.7% MoM in May, +5.3% expected).
In addition, UK inflation data showed that the headline consumer price index (CPI) rose by 2.0% (down from 2.3%) and the core CPI, which excludes food and energy costs, rose by 3.5% (down from 3.9%). Moreover, this is the first time since October 2021 that the CPI has reached the bank’s target.
In addition, money markets currently see the Bank of England rolling out around 45 basis points of easing by the end of the year and nearly 30 basis points of easing by November.
As for upcoming events, the latest inflation data is unlikely to challenge the Bank of England’s view that it will launch an easing cycle in the second half of this year, while the possibility of a cautious message from the Bank of England should not be ruled out, especially highlighting that services inflation and the domestic labor market remain tight.
In summary, the Bank of England is expected to keep its policy rate at 5.25% at 19:00 Beijing time on Thursday. The vote is expected to remain 7:2, with some revisions to the accompanying statement. Traders seem likely to be particularly interested in the interest rate recommendations for the August meeting. It is worth recalling that in its May policy decision, the central bank stressed the importance of the upcoming data for making monetary policy decisions.
After the May 9 meeting, Bank of England Governor Andrew Bailey said that future rate cuts may need to exceed current market expectations to prevent inflation from falling below the target. On Thursday, Bailey said that even a small rate cut by the Bank of England would keep monetary policy within a restrictive range.
Outgoing Bank of England Deputy Governor Ben Broadbent reportedly insisted that a rate cut in the summer was possible. Broadbent said that for the Bank of England to justify a rate cut, data must be consistent with their forecasts. He also stressed that he would consider services CPI more in the short term when making a decision.
His colleague Megan Greene had previously pointed out in April that high wage growth and services CPI indicated that inflation was persistent, so a rate cut was unlikely in the near future, but now she has adjusted her position. Greene reportedly acknowledged that the persistence of inflation has weakened, so she omitted her previous statement about a rate cut in the near future. Therefore, if the upcoming data further shows that inflation is falling, the market may expect Greene to vote for a rate cut at the June meeting, adding to the dovish sentiment of the previous trading day.
