BoE Preview: Forecasts from nine major banks, a dovish pivot

The boring part of the meeting should be the MPC voting to keep rates unchanged. What will be more interesting is the vote split, new economic forecasts and possible changes to the guidance. While many underlying assumptions are being updated, the major shift will be the lower Bank Rate path that will likely make it harder to achieve the 2% inflation target. However, we believe this could be partially offset by the softer wage data increasing the MPC’s confidence in the “swathe of wage models” that point to a sharper fall in pay growth than the Bank’s current forecast. Coupled with softer GDP growth and inflation data, it should allow all members of the MPC to vote to keep rates unchanged, although we have low conviction with this latter call.

We expect the BoE to keep the Bank Rate unchanged at 5.25%. Overall, we expect the MPC to deliver a dovish tilt to its guidance coupled with a downward revision to its inflation forecast. We expect EUR/GBP to move modestly higher upon announcement.

The BoE is almost guaranteed to hold Bank Rate unchanged at 5.25%. We look for all nine MPC officials to vote for hold and for the Bank to finally drop its explicit hiking bias. 

We expect the central bank to stay on hold for a fourth meeting in a row, keeping the Bank Rate at 5.25%, but signal a soft dovish pivot. Further out, we see the first rate cut in May but acknowledge risks are skewed to a later start.

We expect the BpE to keep rates on hold at 5.25%. One or two known hawks could affirm the tightening bias by dissenting in favour of a hike. December’s rise in headline inflation serves as a useful reminder that caution is warranted and the disinflationary process isn’t going to be smooth. The risk of an inflationary impulse stemming from the Red Sea, the lack of an accurate read on the state of the labour market and the prospect of tax cuts in the run-up to the general election are three factors to exercise patience. However, the wider data flow should eventually persuade the BoE that it could ease its policy stance from the summer onwards. We now see a first cut in September instead of November.

The reality is that defending a ‘higher for longer’ stance on interest rates is getting harder to defend as the inflation backdrop shows signs of improving. Even so, we expect the Bank will still want to tread carefully. Lower market rates will at least offset the recent improvement in inflation and the BoE’s two-year ahead forecast may be a little above 2%. What really matters for markets though is what the Bank does to its policy statement. We suspect it will drop the suggestion that it could raise rates further, but keep the signal that rates need to stay restrictive for an extended period. As for the vote split, we suspect the hawks will finally throw in the towel and stop voting for a rate hike. At the same time, we think it’s probably too early to see the doves voting for a cut. That leads us to expect a unanimous decision to keep rates on hold.

We expect the BoE to keep policy on hold. While the statement is likely to acknowledge the progress on inflation, the MPC will want to see further progress on wage growth before being ready to start cutting rates. Our base case is that rate cuts start in August.

The main aim of the meeting may be to endorse this year’s hawkish re-pricing (which has re-opened a gap between BoE cut pricing (later vs Fed/ECB). Headline dovish developments might be dropping the tightening bias in the policy summary (in line with the global trend and given it looks stale) and/or a dovish shift in the 6-3 vote split. On the other side, the hawkish push back could come via CPI projections. UK inflation is currently undershooting BoE’s forecasts, but another major development is lower front-end re-pricing. The market-implied path for Bank Rate has likely added around 100 bps of additional cuts since November, making it about 200 bps of cuts in total. This will likely open up a wide gap between CPI projections using constant Bank Rate vs the market-implied path, especially at the 3yr horizon. In November, the CPI forecasts using the market-implied path were clustered around 2% (modal and mean), although the 3yr mode was some way below. The new market-implied policy path clearly adds upward pressure, and this could be how the BoE opts to push back.

Economic data from the UK has been generally soft as of late, but neither consensus economists nor our team view rate cuts as appropriate just yet. GDP readings have been underwhelming, December retail sales data surprised to the downside and inflation has generally followed a downward trend late in 2023. In addition, wage data from November showed cooler than expected growth in weekly earnings. However, inflation and wage data are probably still running too hot for the BoE's liking, with December core inflation at 5.1% YoY. And while wage growth has come down, the measure is certainly still elevated by historical standards. Related to wage inflation is the services CPI which is also elevated. These factors contribute to our forecast for the BoE to hold rates steady until delivering a 25 bps cut at the June meeting. While this upcoming meeting will likely not bring a change in the policy rate, market participants will closely scrutinize the monetary policy statement for any dovish-leaning tone changes that may signal possibilities for a monetary easing timeline.