BoE to Hold Interest Rates as Disinflationary Pressures Mount

The Bank of England (BoE) is widely anticipated to maintain its policy rate at 5.25% during its meeting on Thursday, marking the sixth consecutive time the central bank has held rates steady. This decision comes amid growing disinflationary pressures in the UK economy and increased speculation that the BoE might lower interest rates sooner than expected.

Following Thursday’s meeting, the BoE will release its Monetary Policy Minutes and Monetary Policy Report. These will be followed by a press conference with Governor Andrew Bailey, where analysts expect further insights into the central bank’s current monetary policy stance.

While the BoE was initially expected to lag behind the Federal Reserve and the European Central Bank in easing measures, recent economic trends suggest the UK might initiate interest rate cuts earlier than anticipated. Investors are betting on a potential cut by August or September, with a 70% chance of a second reduction by December.

The shift towards a more dovish outlook comes as UK disinflation accelerates. In March, the headline Consumer Price Index (CPI) rose by 3.2%, down from 3.4% in the previous month. The core CPI, which excludes food and energy costs, increased by 4.2%, also down from 4.5%. These declining inflation rates challenge the BoE’s earlier guidance of “higher for longer” regarding interest rates.

Governor Andrew Bailey recently hinted at the potential easing of monetary policy, acknowledging during an Institute of International Finance event that upcoming inflation figures are expected to show a significant decrease. He also mentioned signs of a loosening labour market, another factor that could lead to reduced interest rates.

Data from the BoE’s Decision Maker Panel survey conducted between March 8 and 22 supports this narrative. The survey revealed that one-year-ahead CPI inflation expectations fell to 3.2% from 3.3% in February. Similarly, three-year-ahead expectations dropped to 2.7%. Expected year-ahead wage growth, measured on a three-month moving average, also declined to 4.9%.

Despite these trends, analysts remain cautious about the BoE’s immediate actions. TD Securities expects the BoE to maintain rates at its May meeting, citing persistent wage and inflation data. Danske Bank strategists concur, predicting the central bank will keep its rate at 5.25% but soften its communication to signal an imminent rate-cutting cycle, possibly as soon as June.

Given these developments, the British Pound is likely to remain within its familiar range, with no clear indications of when the BoE might lower interest rates. For the GBP/USD currency pair, a key level to watch is the 200-day Simple Moving Average at 1.2545. If GBP/USD clears this level, it could pave the way for further gains, with targets at the May peak of 1.2634 and the 2024 top of 1.2893.

However, risks persist on the downside. If the selling bias resurfaces, GBP/USD could fall back to the 2024 bottom at 1.2299, with further downside risk if it breaches this support level.

Overall, the Bank of England’s decision to hold interest rates and the mounting disinflationary pressures point to a challenging environment for UK monetary policy, with potential implications for currency markets in the months ahead.