26/07/2024
Written by: Ian Morley
Summary
The British Pound displayed minimal response to the recent decision by the Bank of England’s monetary policy committee, maintaining interest rates for the fourth consecutive meeting. The committee emphasized the need for additional evidence indicating a decline in inflation to the 2% target before considering a reduction in borrowing costs. Governor Bailey asserted the requirement for substantial proof of sustained inflation decline before contemplating interest rate adjustments. Despite a majority decision to keep rates unchanged, two members advocated for an immediate hike, and one member favoured a cut. The Quarterly Inflation Report indicated a significant downward revision in the Bank’s inflation forecasts, predicting a dip below 2% in May followed by a rebound, citing robust wage inflation.
Further insights into the committee’s decision may emerge during an online presentation by BoE Chief Economist Huw Pill, where new forecasts and policy decisions will be discussed.
In other markets, a potential ceasefire between Israel and Gaza elevated US equities to record highs during the European session, leading to a decline in oil prices, a drop in the US dollar, and a rise in “risk” currencies like the GBP.
Today, attention is on the release of the latest official government employment report, with expectations of a decrease in Non-Farm payrolls and wage growth compared to the previous month.
Market participants are closely monitoring Federal Reserve Chair Powell’s recent statement, suggesting that weak employment figures could bring a March rate cut into consideration.
Our Analysis
Considering the decision of both the US and UK to maintain interest rates, the markets seem to be disregarding the central banks’ guidance of three rate cuts this year and are instead pricing in six reductions in borrowing costs. This aggressive pricing reflects a belief in a global economic slowdown and potential recession later in the year, prompting policymakers to slash rates. With the absence of clear guidance from the Fed and BoE, monetary policy is now heavily dependent on forthcoming economic data.