LONDON (Reuters) -Britain’s economy is “moving in the right direction” for the Bank of England to start cutting interest rates, Governor Andrew Bailey said as two of his colleagues dropped their vote a rate hike.
The BoE’s rate-setters voted 8-1 to keep borrowing costs at their 16-year high of 5.25% on Thursday as the two officials who had previously called for higher rates changed their stance.
Most economists polled by Reuters had expected one member of the Monetary Policy Committee to continue voting for an increase in Bank Rate.
MARKET REACTION:
FOREX: The pound fell against the euro and the dollar. It was last down 0.35% at $1.2743 versus $1.2749 earlier.
BONDS: British government bond yields extended their falls, with rate-sensitive two-year yields down 11 bps at 4.11% compared to 4.14% just before the BoE statement.
Interest-rate futures showed traders are pricing a 76% chance the BoE will cut rates in June.
STOCKS: UK stocks rallied, with the blue-chip FTSE 100 hitting an intra-day high just after the BoE decision.
COMMENTS:
FIONA CINCOTTA, MARKET STRATEGIST, CITY INDEX, LONDON:
“That what’s really caught my eye – the two hikes last meeting have turned more neutral and looking to keep rates on hold.”
“Overall that must make for a less hawkish position from the central bank. And you can see the ship is turning towards that rate cut and that is what the pound has grasped on to. It’s definitely a much more concrete feeling that the next move is going to be a cut and it’s going to be coming, potentially, sooner than we thought, especially now that we don’t have those two hawkish votes.
“What might offer the pound a bit of support against the euro and the U.S. dollar, as we go towards the next meeting is the fact that inflation is still stickier in the UK and also the services sector is still holding up strongly, service-sector inflation at 6.1% is still very sticky.”
COLIN ASHER, SENIOR ECONOMIST, MIZUHO BANK, LONDON:
“The meeting unfolded more or less as expected. The shift in the vote is dovish but its not especially dovish, as in a cutting cycle its the doves rather than the hawks that drive things. The rest of the committee don’t need Mann and Haskel to lower rates.
“There don’t seem to be many cracks in the centre as yet – there were plenty of references to inflation persistence (and today’s PMI data don’t help on this front).
“May seems to be off the table for rate cuts unless something bad happens. June is possible but we still see August as most likely at this point.”
SUSANNAH STREETER, HEAD OF MONEY AND MARKETS, HARGREAVES LANSDOWN, LONDON:
“The Bank of England has adopted the same stance as the Fed yesterday and the ECB … indicating that inflation is following the right path, but it’s still wary about the potential for prices to bubble up again.
“Input costs are continuing to climb due to wage pressures and higher shipping fees, so companies are pushing up prices. So, it’s not surprising that caution remains the name of the game for the Bank.
“Continued stubbornness in wage growth could tip a decision by the Bank of England towards August instead (of June), when a fuller monetary policy report is published.”
PHILIP SHAW, CHIEF ECONOMIST, INVESTEC, LONDON:
“The decision to hold rates itself and the arguments which committee members are putting forward are no surprise.
“If the shift in the dynamics on the committees is representative of the MPC (Monetary Policy Committee) as a whole, then we maintain our current view that the Bank of England will begin to cut rates in June.”
(Reporting by EMEA Markets Team; Editing by Amanda Cooper and Dhara Ranasinghe)
