The BoE is expected to keep interest rates unchanged at 5.25% with a 8-1 vote split in favour of a hold and Dhingra the only one voting for a rate cut. The focus will be on further dovish hints for a reduction in the policy rate in summer. In fact, we got the first dovish change back in February when the BoE dropped the tightening bias in the statement. In March, we got another dovish signal as the vote split changed with Haskel and Mann voting for a hold whereas previously they both voted for a rate hike.
Central banks generally make such small tweaks to prepare the markets for changes in the monetary policy to avoid volatility and abrupt moves. Therefore, we should focus on those small changes that could come from the vote split or the policy statement. The central bank will also release its updated economic projections where a downward revision to their inflation forecast could be a dovish signal.
Looking at the recent data, the UK PMIs continued to improve with the commentary noting that activity rose at the fastest rate in 11 months with input cost inflation being the highest since August 2023, although output charge inflation decreased slightly. There's of course a latent fear that those costs will eventually be passed on to consumers leading to a reacceleration in inflation. That might also be justified by the high wage growth rates which stand around 6% although they eased from the peak around 8% in summer 2023.
The latest inflation report showed the headline and core figures moderating further but the services inflation measure remained sticky around 6%, which was above the 5.8% forecast.
On the labour market side, the latest data showed an increase in the unemployment rate and job losses. Wage growth generally lags the unemployment rate. The market expects the first rate cut in August with a total of 55 bps of cuts expected in 2024.
