Bank of England decision preview: cut or no cut?
This week’s Bank of England (BoE) meeting is likely to see no change from policymakers, despite signs of weakening inflation.
Investors still awaiting a UK rate cut
The Bank of England (BoE) must decide next week whether to signal when it might cut interest rates for the first time since 2020, despite risks that such a move could prove premature given lingering inflationary pressures.
While inflation has dropped sharply, the labour market remains tight with wage growth around 6%. Financial markets are only fully pricing in a first BoE rate cut in September.
Policymakers send mixed signals
BoE Governor Andrew Bailey has sounded open to rate cuts this year as inflation falls, and one policymaker voted for cuts in February and March. However, several top officials have sounded cautious about cutting rates too soon given elevated wage growth.
Inflation forecasts still key
The BoE may only make minor changes to its messaging on May 9, though it could cut its inflation forecasts to signal that markets are under-pricing the likely extent of future rate cuts. Managing expectations will be key to avoid stoking excessive rate cut bets that could weaken sterling and complicate efforts to return inflation to target.
Wage growth strength complicates outlook
The BoE faces a conundrum as it weighs whether to start cutting interest rates soon. On one hand, annual consumer price inflation in the UK has fallen to 3.2%, still above the BoE's 2% target. However, sticky wage growth threatens to entrench higher inflation over time.
Data from the Office for National Statistics showed annual earnings growth at 6% in the latest reading, defying expectations of a larger slowdown. Several BoE policymakers have voiced concerns that such elevated wage increases could perpetuate inflationary pressures.
Wage-price spiral risks ahead?
Huw Pill, the Bank's chief economist and MPC member, cautioned last month that cutting rates prematurely carries "greater risks" than waiting too long. The BoE is caught between wanting to ease the burden on borrowers as inflation cools, while avoiding sparked a wage-price spiral.
With wage growth still outpacing the 2% inflation target by a wide margin, the BoE may face tough communication challenges around signalling the timing and pace of any future rate cuts. Erring on the side of keeping policy tighter for longer could be a prudent approach to anchoring inflation expectations.
BoE trapped by global forces & domestic pressures
The decision comes as the Federal Reserve (Fed) pushes back on rate cut timing, adding to the BoE's communication challenges. The BoE must navigate domestic inflationary pressures while accounting for global market forces beyond its control.
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Be ready to act on Bank of England announcements
Take a closer look at the potential effects of the BoE’s interest rate announcement, ahead of the next Monetary Policy Committee (MPC) meeting on 24 June 2021.
- What was decided at the last BoE meeting?
- How does the MPC influence inflation?
- How might the pound be affected by the next meeting?
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