PoundSterlingLIVE - The British Pound was under pressure into the Bank of England's February update but recovered after policymakers let it be known it was no closer to cutting interest rates.
One member of the Monetary Policy Committee (MPC) - Swati Dhingra - voted for a cut, but being a perma-dove the move doesn't carry much weight. More importantly, six members voted to keep interest rates unchanged, and two voted for further rate hikes.
This vote composition leans on the 'hawkish' side, as does the Bank's statement, which retained the crucial line that "monetary policy will need to remain restrictive for sufficiently long to return inflation to the 2% target sustainably in the medium term."
The retention of this phrase and the vote composition suggests the Bank is maintaining the 'higher for longer' mantra through the first quarter.
Fading odds of an early rate cut have ensured the British Pound is a joint top performer in the G10 for 2024; today's developments can keep this trend going.
The Pound to Euro exchange rate was sold steadily through the morning session but recovered sharply to above 1.17 following the announcement. The Pound to Dollar exchange rate was under pressure owing to the previous day's Federal Reserve policy decision - which also pushed back on rate cut bets - but it recovered a quarter of a per cent in the wake of the decision to go to 1.2667.
The new forecasts from the Bank are also important and convey a clear sense of why an expected fall in inflation to 2.0% in April won't invite an immediate rate cut.
The Bank says in a statement that CPI inflation is projected to fall temporarily to the 2% target in 2024 Q2 before increasing again in Q3 and Q4.
"While inflation is following a downward trend towards the 2% target, it’s not clear whether rates will follow suit. Relatively high wage inflation alongside an uptick in services inflation in December means that a rate cut before the summer is increasingly unlikely to materialise," says Anna Leach, Deputy Chief Economist at the CBI.
In a potential nod to the prospect of rate cuts down the line, the Bank acknowledges that the risks to inflation are more balanced.
"Although services price inflation and wage growth have fallen by somewhat more than expected, key indicators of inflation persistence remain elevated," says the statement.
Crucially, the Bank's new inflation forecasts show inflation will remain above the 2.0% target over nearly all of the remainder of the forecast period.
This reflects the persistence of domestic inflationary pressures, despite an increasing degree of slack in the economy. CPI inflation is projected to be 2.3% in two years’ time, says the Bank.
An original version of this article can be viewed at Pound Sterling Live
