UK reaction: Dovish shift; June cut now on the cards

The MPC left Bank Rate unchanged at 5.25%, as was widely expected, but the vote split shifted from net hawkish to net dovish, with both Haskel (widely anticipated) and Mann (not expected) changing their vote to a hold, having pushed for a further 25bp hike in February. Note that this is the first time since 2021 that no member has voted for a hike. Dhingra kept her vote for a 25bp cut. The MPC maintained that “monetary policy will need to remain restrictive for sufficiently long,” and that they have “judged since last autumn that monetary policy needs to be restrictive for an extended period of time until the risk of inflation becoming embedded above the 2% target dissipates.” But they also stated that the “stance of monetary policy could remain restrictive even if Bank Rate were to be reduced, given that it was starting from an already restrictive level.”

The MPC also revised down its forecast for CPI inflation in Q2 on the back of the fuel duty freeze in the Spring Budget and now expects the headline rate to drop slightly below the 2% target in Q2, though they highlighted some upside risks given the geopolitical backdrop. Caution around the labour market outlook, however, remained, particularly given the inadequacy of the official data. Indeed, the Committee maintained that while the labour market appears to be loosening, it remains relatively tight by historical standards and that pay growth still is elevated, despite easing in recent months. The April average earnings numbers, therefore, remain key, with most members want to see the impact of the near-10% increase in the National Living Wage and benefit hikes. Note that most low-pay employers appear to be passing on most of the NLW increase, so some upward pressure on wages, albeit fairly mild, looks likely.

We think that a desire to see wage developments rules out a cut at the next meeting (as does the fact that the BoE’s guidance today was completely unchanged from the previous months). However today’s meeting has increased the chances of a June move. A decision between whether to ease in June or August has become even more finely balanced to our minds and will ultimately depend on key data over the coming months, namely the impact of the NLW hike and benefit increases which the MPC will have by June’s meeting. Both wage growth and services inflation would probably have to undershoot the MPC’s expectations in the coming months to quell concerns over the persistence of inflation among the majority of members for a move by June. However, given recent trends in the figures, this looks more likely than not. Of course, key indicators of inflation persistence remained elevated this month and underpinned the majority vote in March. And the MPC would most likely want the benefit of new forecasts, published alongside any rate decision in August. However, on balance we think that the probability has moved in favour of an earlier June move than we considered, albeit dependent on data published over the coming months.  Whether the first move comes in June or August, we remain confident that the Bank will push through 75bps of easing this year, we now forecast additional cuts of 25bp in September and November. 

Looking ahead, concerns that the UK has a persistent inflation problem seem overblown to us and we are becoming increasingly focussed on the prospect of a prolonged undershoot of the inflation target next year.  As a result, we additionally think the Bank will have to continue to ease policy in the latter part of 2025: we see the Bank continuing to ease policy - albeit at a slower pace - into the second half of 2025, and now look for a year-end target of 3.25%, compared to 3.75% previously.

Markets reacted to the news, but earlier moves have been tapered by US data. After an initial drop in the 2-year yield to 4.08%, from 4.14% and in the 10-year yield to 3.92%, from 3.95%, both have since rebounded to 4.15% and 3.99%, respectively. Accordingly, sterling dropped 0.4% against the dollar to $1.270 due to the firmer US data, but was down only 0.1% to the euro. Markets are now fully pricing in three cuts this year and more than a 50% probability of a June cut.