BoE moves closer to a first rate cut, sterling falls
2024.05.09 07:50
LONDON (Reuters) – The Bank of England on Thursday took another step towards lowering interest rates, as a second official backed a cut and Governor Andrew Bailey said he was “optimistic that things are moving in the right direction”.
The BoE said on its Monetary Policy Committee voted 7-2 to keep rates at a 16-year high of 5.25%.
MARKET REACTION:
FOREX:
Sterling fell to $1.245 from $1.2486 just before the decision and was last down 0.25%. Against the euro, the pound traded at 86.14 pence, compared to 85.96 earlier
BONDS: British government bond yields fell. The interest-rate sensitive two-year gilt yield was last down 2.5 basis points at 4.289% . It had traded at 4.326% earlier.
STOCKS: London’s FTSE-100 stock index rallied to a new record high, while the more domestically focussed pushed into positive territory, having traded lower earlier on.
COMMENTS:
LINDSAY JAMES, INVESTMENT STRATEGIST, QUILTER INVESTORS, LONDON:
“While this feels significant, it is important not to get ahead of ourselves. Markets have been a little giddy in recent quarters about the prospect of interest rate cuts, but that has since faded.
While markets have begun to price in rate cuts beginning by the end of the September meeting, the floodgates won’t simply just open. Central banks have a tendency to be fairly conservative in the way they act and thus market expectations for just two rate cuts by year end look reasonable.”
JAMIE DUTTA, MARKET ANALYST, VANTAGE MARKETS, LONDON:
“The bank tweaked its inflation forecasts lower, while also changing its statement language by stating that risks regarding inflation persistence were now receding.
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This change is a big clue that the bank could be intending to cut interest rates next month.
The beginning of policy easing in June is seeing market pricing shift from two rate cuts currently priced in, to three in 2024. The pound has inevitably fallen on the news. Policy divergence with the Fed is increasing, with the Bank of England now potentially more in tune with the ECB.”
JEREMY BATSTONE-CARR, EUROPEAN STRATEGIST, RAYMOND JAMES INVESTMENT SERVICES, FRANCE:
“Ahead of June 20th, April’s CPI data on May 22nd is expected to show that price increases have fallen sharply, laying the ground for rate cuts the following month. Although the labour market has shown signs of loosening, providing additional encouragement to the MPC, the possible inflationary consequences of a rate cut remain concerning to some the rate-setters. The Committee thus remains divided on the road ahead, with some finding that the pace of deflation is still too slow for comfort.”
CHRIS SCICLUNA, HEAD OF RESEARCH, DAIWA CAPITAL MARKETS, LONDON:
“It’s in line with our expectation given the restrictive nature of market rates in recent months.”
“Normally, such an inflation forecast would have triggered a rate cut, but there are concerns about the labour conditions.”
“By the time we get to June, they will likely have the confidence to pull the trigger on a rate cut. So, they want to see a bit more data.”
“Our base line is for a June rate cut.”
