The Bank of England (BoE) is anticipated to maintain the existing interest rates this week while it patiently waits for more definitive indications of a slowdown in wage increases and service sector inflation, which would allow for a reduction in borrowing costs. The market’s expectation is that the BoE will uphold the benchmark rate at 5.25%, as declared by the Monetary Policy Committee this Thursday. This would denote the fifth consecutive assembly without any change in rate, post 14 sequential hikes. Insights from the swaps market–a reliable predictor of BoE’s future rate directions– suggests the first reduction is likely only by August, and possibly one or two more by year-end. Other leading central banks like the Federal Reserve and European Central Bank (ECB), are also likely to maintain their rates till they have substantial evidence of long-term reduction prospects of inflation. The ECB remained constant on rates this month and the Fed is expected to follow suit on Wednesday. Sandra Horsfield, Investec economist, stated that ‘Not yet’ is the shared sentiment among the Bank of England, the Federal Reserve, and the ECB at the moment. Recent official data this month indicated the UK labour market is softening with slower wage growth, lesser job vacancies, static growth in payrolled staff numbers, and more people applying for unemployment aid. Annual wage growth has slightly decelerated to 6.1 % in the three months leading to January from the previous 6.2%. Despite the slowdown, the BoE treads cautiously given the ongoing quality issues with the Office for National Statistics surveys. Analysts state that the rate of wage rise well surpasses levels parallel with the central bank’s 2% inflation goal. The Monetary Policy Committee will keenly monitor the pay settlement pattern by employers in March and April. As per analysis by Incomes Data Research, median wage hikes across the economy remained unwavering at 5% in the three months to January.
Among the 63 deals scrutinised, a quarter had a value of 6% or more. The national living wage increase, which is set to rise by 9.8% in April, is a significant influencing factor. It is projected to not only affect the wage of individuals earning at or above the state-mandated minimum, but it is also predicted to trigger cascading impacts on the remuneration of some workers.
Andrew Goodwin, a professional economist associated with Oxford Economics, claimed that recent indicators do not imply wage would fall below the Bank of England’s (BoE) prediction of 5.7% for the first quarter. He further added that it’s likely the majority of Monetary Policy Committee members (MPC) will await more data regarding pay adjustments in the new year before deciding on rate reductions.
There’s an ongoing debate about whether banks should shoulder the responsibility for providing cash access in the future. The waiting period provides the BoE ample opportunity to gather comprehensive economic forecasts planned for its meeting in May.
BoE officials have been closely observing the upswing in service prices, which experienced a 6.5% surge in January compared to the previous year. They consider the prices levied by the vast UK service sector to be a crucial measure of the inherent pricing pressures within the economy.
In their effort to subdue inflation, the MPC primarily supported interest rate hikes between November 2021 and the previous summer. However, when the nine-member committee convened last in February, opinions differed. Catherine Mann and Jonathan Haskel voted for a rise in rates to 5.5%, whereas Swati Dhingra advocated for an instant rate reduction. The rest of the members opted for no change.
Andrew Bailey, the governor at the BoE, emphasised post-meeting, that ‘encouraging news on inflation’ had been observed in the preceding few months. He further warned that tangible proof of inflation plummeting to the 2% benchmark and remaining there is essential before considering lowering interest rates.
With headline inflation anticipated to swiftly decrease to the 2% benchmark due to reductions in energy prices, there might be mounting pressure for rate reductions in the approaching months. Presently, Consumer Price Inflation stands at 4%, a noticeable difference from its peak of over 11% in 2022.
The official inflation figures for February are due to be announced on Wednesday, and forecasters suggest a probable reduction in the headline CPI inflation rate to 3.6%, based on a Reuters survey of analysts.
In its prediction made back in February, the Bank of England (BoE) forecasted an upward trend in price growth commencing later in 2024 after hitting rock-bottom in the second quarter. This prediction lent support to those advocating for the central bank to maintain a restrictive policy.
However, this view is not shared unanimously. The Office for Budget Responsibility, the nation’s fiscal watchdog, disputed the rapid recovery of CPI inflation.
While markets have prophesied rate cuts being announced by both the Federal Reserve and the European Central Bank this summer, the BoE’s officials have remained restive about the timing of their initial decrease. The primary economist, Huw Pill, recently emphasized his belief that the commencement of the first move is still in the distant future.
According to Allan Monks, a UK economist at the investment bank JPMorgan, the BoE is likely to require further reassurance before initiating rate cuts. There’s a desire within the Bank to steer clear of future retractions post the inception of easing and to manage expectations post-start. – Copyright The Financial Times Limited 2024.