Morgan Stanley Suggests Possibility of BoE Rate Cut in May

Morgan Stanley has maintained its stance on the possibility of a Bank of England (BOE) interest rate cut in May, diverging from prevailing market sentiment. Jens Eisenschmidt, chief economist at the Wall Street bank, reiterated this stance during an interview with CNBC’s “Street Signs” on Wednesday.

The prediction for a May rate cut stands in contrast to market consensus, which currently anticipates an initial BOE rate reduction in September, according to LSEG data. This divergence comes amidst the backdrop of the United Kingdom preparing for a general election before January 28, 2025.

In recent weeks, expectations for a rate cut have waned, influenced by persistent U.S. inflation and increasingly hawkish comments from the Federal Reserve, which have raised doubts about global disinflation trends. Additionally, concerns over escalating tensions in the Middle East have clouded the European Central Bank’s plans for rate adjustments.

Despite these factors, Bank of England Governor Andrew Bailey expressed optimism about the U.K.’s inflation trajectory, noting that recent data aligned closely with the institution’s forecasts. Although March’s inflation figures slightly exceeded expectations, reaching 3.2% compared to the projected 3.1%, analysts anticipate a gradual decline in inflation over the second quarter, followed by a resurgence towards 3% later in the year.

Morgan Stanley‘s U.K. economist shares this outlook, highlighting the ongoing uncertainties surrounding the global disinflationary process. Eisenschmidt emphasised the cautious approach adopted by central banks, suggesting a measured pace in response to economic dynamics.

He stated, “In general, the central banks are all, to some extent, in the same boat. The disinflationary process is bumpy, it’s not fully secured, and so you want to go slow, you want to go at a measured pace.”

Morgan Stanley recently revised its forecasts for both the European Central Bank and the Federal Reserve, now expecting three rate cuts from each central bank throughout the year. The revised outlook anticipates the ECB’s first rate reduction in June and the Fed’s initial trim in July.