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Bank of England preview: possible rate cut in summer?

Published 07/05/2024, 13:50
GBP/USD
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The Bank of England (BoE) is widely expected to keep interest rates unchanged when it meets later this week. Data from Reuters shows a 90% chance of no change to the current rate of 5.25%, but the central bank will need to decide whether to change the messaging about rate cuts this year as traders will be paying close attention to any rate-cut clues.
 
Current pricing shows 53 basis points of cuts in 2024, with the first cut coming in August, followed by a second one in December. This could well change in the coming months as the data evolves, which means we may see more than two cuts if the data worsens significantly, or less than two if the economy remains resilient and the disinflation process stalls. How the BoE sees the path of interest rates evolving this year will likely be what investors will be trying to find out on Thursday.
 
So far, the labour market is still generating inflationary pressures, which is limiting the central bank’s ability to start cutting rates. Growth in consumer prices (CPI) has dropped significantly over the past 12 months, but it remains above the long-term 2% target and may be at risk of stalling in the last leg of the disinflation process.
 
But Governor Andrew Bailey remains confident that the Bank of England will be able to deliver rate cuts in 2024, even if fewer than originally hoped for. He reasons that the April CPI data will show a big drop when it is released on 22 May. There is a big risk of policy error in the coming months if expectations are not handled correctly, so Bailey and his team will need to be as forthcoming as possible with their messaging without giving away when they expect to start cutting rates. The meeting on Thursday will include an updated monetary policy report so investors will be able to gauge how the economy is expected to evolve given the latest data.
 
When it comes to the pound, the main driver will likely be how the BoE’s policy direction differs from other central banks. For GBP/USD, the British central bank is expected to start cutting rates sooner than the Federal Reserve, given the resilience of the US economy. This is expected to continue to exert downward pressure on the pair, limiting the potential for further advances. That said, the short-term momentum has been building higher over the past few weeks and has comfortably settled above 1.25. If the takeaway from the meeting on Thursday is dovish, then GBP/USD could retrace some of the cement bullishness, potentially dropping back below 1.24 over the coming days. Alternatively, a hawkish BoE meeting would likely push back expectations of rate cuts, which could cement the recent bullishness in GBP/USD in an attempt to close above 1.26.


GBP/USD daily chart



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