As expected, the Bank of England (BOE) kept interest rates steady at 5.25% in its May decision.
The official statement indicated that:
- Underlying inflationary pressures in the euro area have continued to moderate somewhat since the beginning of the year
- UK demand growth is expected to remain weaker than potential supply growth, so a margin of recession is expected later this year and into 2025.
- Consumer inflation in the services sector has declined but remains high
- CPI inflation is expected to return to closer to the 2% target in the near term, but may rise in the latter half of the year due to subdued energy-related fundamental effects.
- Monetary policy must remain tight long enough to return inflation to the 2% target sustainably over the medium term
Minutes from the Monetary Policy Committee meeting revealed that two dovish members voted for a 0.25% rate cut this time instead of a unanimous vote. This also reflects a more cautious view compared to the previous 8-1 vote.
During the press conference, Bank of England Governor Bailey explained that the central bank has not yet reached the point of cutting interest rates. However, he also hinted that easing may be necessary in the coming quarters and that cuts may be “more significant” than markets expect.
Bailey explained that the current restrictive monetary policy is effective at the moment but he expects a potential rise in inflation later in the year.
Later in the day, BoE's Bell reiterated these relatively dovish expectations noting that there is growing confidence in starting to ease policy restrictions soon but that it is not yet time to act.
Market reactions
British pound against major currencies: 5 minutes
Overlay of the British pound against the major currencies Chart by TradingView
Sterling saw a sharp decline across the board after hearing the Bank of England's decision was more pessimistic than expected, with two dissenters voting in favor of easing monetary policy at the time.
The British currency was able to reduce its losses and rise during the press conference held by Bailey, where he stressed that it is not time to lower interest rates yet. Interestingly, the pound continued to recover, even after Bailey hinted that future cuts were likely in the coming quarters, and that they could be greater than expected.
The GBP/CAD pair managed to rally near pre-BoE levels, while the GBP/USD pair continued to rise, getting additional support from weaker-than-expected US initial jobless claims data.
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