PT Solid Gold Berjangka | BOE Moves Closer to Rate Cut as Ramsden Joins Easing Camp
BOE Bank Of England PT SGB Solid Group SG Berjangka Solid Gold Berjangka
Solid Gold Berjangka | The Bank of England moved closer to cutting interest rates from a 16-year high as a second policymaker voted in favor of lowering borrowing costs and Governor Andrew Bailey said he was “optimistic that things are moving in the right direction.”
Deputy Governor Dave Lumsden, along with external member Swati Dhingra, called for an immediate cut in the base rate from the current 5.25%. The other seven members of the Monetary Policy Committee preferred no change, citing the need for more evidence that inflation will be contained.
The reason is to halt upward pressure on wages and prices, which reached a 40-year high in the second half of 2022. Forecasts released in conjunction with the decision suggested that the BoE would need to cut rates in the coming months, possibly before the general election widely expected in the fall.
BOE officials expect inflation, which peaked at over 11%, to fall to the 2% target in the second quarter due to lower energy prices, and to rise more moderately than previously expected later in the year. However, they warned of upside risks from “geopolitical factors.”
Under market expectations of two quarter-point cuts this year and a gradual decline to 3.75% in mid-2027, inflation would fall below target at the end of the second year of the forecast and further below a year later.
The BOJ also adjusted its guidance on policy developments. It maintained its view that “policy may remain restrictive even if the Bank Rate is cut,” adding that it will “closely watch upcoming data releases and how they affect our assessment that risks from persistent inflation are receding.”
While investors are expecting a rate cut in August, stronger-than-expected inflation in the U.S. and the U.K. has led to rapidly diminishing expectations for additional easing. Bailey, along with Ramsden, has noted in recent weeks that the U.K. economy is following the eurozone more closely than the U.S., and the European Central Bank (ECB) is expected to cut rates next month.
With the ECB expected to cut rates next month, an early rate cut by the BoE could put it at odds with the U.S. Federal Reserve, which is not expected to ease policy until later in the year, and align it with the European Central Bank (ECB). The ECB has indicated a strong preference for a rate cut in June. Sweden’s Riksbank cut interest rates on Wednesday for the first time since 2016.
The BOE’s policy has come under increasing political scrutiny as the government hopes to boost its pre-election polls by cutting rates.
Finance Minister Jeremy Hunt has repeatedly stressed the possibility of a rate cut, saying it would give voters a “feel-good factor” ahead of the UK general election expected in the fall. The bank said the £10 billion tax cut in the March budget would raise the GDP level by 0.25%.
The BOE forecasts that if rates are left unchanged, unemployment will jump to 5.9% by the end of 2026.
As for the economy, the BOE predicted that last year’s shallow recession is over and that the economy will grow 0.5% this year and 1% in 2025. This is an upgrade from the 0.25% and 0.75% forecasts released in February.
A significant improvement in living standards is also expected, with average wage growth of 5.25% this year, well above the rate of inflation. Real after-tax household income will expand by 1.75% this year, exceeding the 2010-2019 average.
The bank also noted that “key indicators of inflation sustainability are moderating,” but payroll and service inflation are still too high. The MPC stated that the labor market is also showing signs of easing and is no longer as tight as it was before the pandemic.
However, the MPC is divided on the timing of the rate cut. Katherine Mann, Jonathan Haskell, and Megan Green recently expressed reluctance to cut rates early, citing strong wage growth and service inflation.
Source: Bloomberg