A View from the Bridge - May 2024

The Bank of England were not expected to move policy rates at today’s meeting so the focus for markets was on the updated quarterly forecasts for growth and inflation along with the accompanying minutes of the two-day policy meeting. In short, the Bank is now much closer to easing policy, with markets moving to price a 50/50 spilt between July and August policy meetings for a 25bp cut to 5%. Although a 7-2 vote split still means that the majority needed more confidence that inflation was returning sustainably to its 2% target, the detail of the monetary policy report suggested that greater conviction isn’t far away. The inflation forecasts at the 2- and 3-year horizon were both below the 2% target using the market implied policy path (which would have been taken in the week prior to the meeting) implying the Bank could cut rates a bit faster than markets expected and Governor Bailey alluded to this during the press conference.

The BOE has the benefit of two inflation reports between now and June 20th due to the later publication of the April data on May 22nd. Obviously, higher than expected data could push back on today’s signal but the hurdle to not cutting seems quite high now. The committee are a lot more confident that the inflation persistence seen in the second half of 2023 is now dissipating more rapidly. Governor Bailey said that global inflation shocks are now fading, and domestic price pressures are expected to moderate further as the labour market moves into better balance. Recent pay and employment surveys such as the REC/KMPG show normalisation towards pre-Covid levels in terms of job openings and wages. The ECB is fully expected to begin cutting rate at its June policy meeting.

The currency and FTSE were placated by the BOE’s dovish signal, the FTSE 100 has posted a record high for 5 consecutive sessions, its longest streak since 2017. It is very difficult for the market to fully reflect an easing cycle before the first rate cut, simply because of the binary nature of the decision to either cut or hold at the next couple of meetings. Therefore, market implied rates likely overstate the actual path in the event they do begin cutting rates in the summer and the contrary in the event the inflation date proves more persistent. The government are in desperate need of a feel-good factor permeating into the electorate, so will be hoping for the former, albeit if it simply stems a landslide at the ballot box.

On May 1st the market was pricing a 33% chance of a rate cut in June with a 25bp cut fully priced by September, however at last nights close, the odds of a cut on 20th June have increased to 60% (100% by 1st August) with an additional 25bp cut fully priced by 7th November. A further 3 cuts are priced during 2025 with a terminal rate of 3.5% priced by the middle of 2026.