Bank of England maintains high rates, foresees future cuts

TLDR:

• The Bank of England is expected to keep interest rates at a near 16-year high of 5.25% in its upcoming meeting, according to bets in futures markets.
• Traders are anticipating rate cuts in the future, however, due to weaker-than-expected economic data and lower inflation forecasts.
• The BoE may revise down its near-term inflation forecasts and cut rates by the spring.
• Interest rate futures indicate that the Bank Rate could be down to 4.4% by December 2024 and 3.45% a year later.

The Bank of England (BoE) is expected to keep interest rates at 5.25%, the highest level since March 2008, in its upcoming meeting. Bets in futures markets indicate that the BoE will maintain its hawkish stance on inflation and the economy, mirroring the decisions by the European Central Bank and the Federal Reserve. However, traders will be closely watching the BoE’s accompanying statement and economic projections for clues on when rate cuts may occur.

The BoE has been battling inflation in recent years, resulting in 14 interest rate hikes. Inflation has since come down to 4% in December but remains above the BoE’s 2% target. The central bank’s November Monetary Policy Report projected “broadly flat” GDP growth in the fourth quarter of 2023 and over the coming quarters. However, recent data has been worse than expected, with GDP, wage growth, and inflation all tracking below the MPC’s November forecasts. Bond yields have dropped and there is speculation of a faster pace of interest rate cuts in the coming years.

Goldman Sachs predicts that the BoE will revise down its near-term inflation forecasts due to softer consumption data and lower energy prices. This may allow for rates to be cut by the spring. Goldman expects a 25 basis point cut in May, followed by cuts at subsequent meetings until the Bank Rate reaches 3% in May 2025. The market is also indicating a decrease in the Bank Rate to 4.4% by December 2024 and 3.45% a year later.

Overall, market participants are anticipating an easing of monetary policy in the future, unless there is another inflation shock. It is expected that the BoE will drop its rate-hike bias in its forward guidance and acknowledge that the next move in rates is likely to be down.