Bank of England set to hold rates as Europe heads for Fed divergence

LONDON — The Bank of England is expected to hold interest rates steady at its meeting on Thursday, with traders expected to delve into the details of Governor Andrew Bailey’s statement amid anticipation of a possible cut rates this summer are being felt.

The BOE’s Monetary Policy Committee is widely expected to keep the discount rate at 5.25%, with an announcement expected at noon.

The committee will assess the data, including UK inflation, which stood at 3.2% in March, slightly above consensus forecasts and still far from the BoE’s 2% target. Core inflation, which excludes energy, food, alcohol and tobacco, was 4.2%, while services inflation, an important indicator for policymakers, was 6 %.

Bailey has nevertheless stressed in recent weeks that he sees strong evidence of falling inflation due to tightening financial conditions.

At the same time, the overall rate of price increases is expected to decline significantly in April due to a sharp year-over-year decline in energy prices, with some forecasts putting it below 2%.

Traders appear uncertain about a rate cut in June, according to money market prices, which put the odds around 50-50. Meanwhile, bets rose from the first move in August, with about an 80% probability of a 25 basis point decline, and a total of 50 basis points of decline this year.

Francesco Garzarelli, head of research at Eisler Capital, said investors would be watching Thursday’s vote distribution among the MPC’s nine voting members for clues about the June meeting.

The last meeting in March saw eight votes in favor of keeping rates steady and one in favor of a cut.

“There’s a lot more to the communication. Bailey’s comments will be important, as well as the predictions,” Garzarelli told CNBC’s “Squawk Box Europe” on Thursday.

“There’s also an optical element here: inflation in the headline numbers is going to come down quite quickly. It’s going to hit its target very soon, and that will put a lot of pressure on the Bank to start normalizing policy.”

“We have started to see in recent months a divergence between US policy and UK and EU policy, and I think here in the UK we will certainly see some reductions later in the year,” Emma said Wall, head of investment research and analytics at Hargreaves Lansdown, told CNBC’s “Street Signs Europe” on Wednesday.

Monetary policymakers at the US Federal Reserve have firmly pushed back against market expectations for a rate cut no sooner than September, due to a recent acceleration in inflation. Some economists are considering the possibility that the Fed will not make any cuts this year.

That led European central bankers to emphasize that they would chart their own course and not wait to follow the Fed’s lead. The Swiss National Bank announced a surprise rate cut in March, and Sweden’s Riksbank also cut rates as expected on Wednesday.

Officials at the European Central Bank, which defines monetary policy for the euro zone, gave a strong signal: they would reduce their rates in June, barring a major shock.

Hargreaves Lansdown’s Wall expects a BOE cut in June, followed by just one more this year. This is largely due to the UK’s economic situation, she said, with the US economy and consumer health proving much more robust despite a recent slowdown.

The UK this week received a downward revision to its growth for 2024 from the Organization for Economic Co-operation and Development, which also expects the UK to lag behind in of growth compared to G-7 economies for next year, Wall noted.

The UK entered a mild recession in the second half of 2023, although recent figures point to slight growth in early 2024.

But according to the research group Capital Economics, the markets are too hesitant in their rate cuts. She expects inflation to fall below 2% in April and to 0.5% later this year, reversing pressure on the BoE to tackle low inflation instead.

As a result, they expect a reduction in the MPC in June and a reduction in rates to 3% next year, from 4% in the market.