Market News

>span class="link xray-cards-arrow xray-cards-arrow-next" aria-label="Show next cards" data-ylk="g:dbdaeff6-2d74-45a7-8ba3-5872e59ba357;itc:1;sec:pill;elm:pill-arrow;slk:next" data-rapid_p="39" data-v9y="0">

>span class="link xray-cards-arrow xray-cards-arrow-next" aria-label="Show next cards" data-ylk="g:dbdaeff6-2d74-45a7-8ba3-5872e59ba357;itc:1;sec:pill;elm:pill-arrow;slk:next" data-rapid_p="39" data-v9y="0">Inflation slowed to 3.4% in February, down from January’s 4%, the lowest since September 2021, according to figures from the Office for National Statistics (ONS).

>span class="link xray-cards-arrow xray-cards-arrow-next" aria-label="Show next cards" data-ylk="g:dbdaeff6-2d74-45a7-8ba3-5872e59ba357;itc:1;sec:pill;elm:pill-arrow;slk:next" data-rapid_p="39" data-v9y="0">BoE set to follow ECB and Fed

However, the data is not expected to sway Threadneedle Street to lower borrowing costs from a 16-year high as central banks around the globe err on the side of caution.

The European Central Bank (ECB) kept rates unchanged this month, while the US Federal Reserve (Fed) is expected to do the same on Wednesday.

Nomura Bank noted that central banks might be suffering from the "fear of going first", with the ECB and BoE circling wagons until the US Federal Reserve cuts rates. However, they argue that both central banks can cut rates independently of the Fed.

“Market pricing for the ECB, and to a lesser extent the BoE, has been largely driven by Fed rate expectations. Market participants believe other central banks have a 'fear of going first', but we think the macroeconomic cycles in the US and Europe are decoupling, which justifies the ECB and BoE going it alone and cutting rates independently of the Fed,” analysts at the bank said.

Is UK inflation falling?

BoE governor Andrew Bailey said after the last MPC meeting that there had been “good news” on inflation in recent months, but that the committee needed to see more evidence that inflation will fall “all the way to the 2%, and stay there” before it can reduce interest rates.

“Inflation looks on a downward path if the most respected economic forecasts are to be believed, but as things stand it still sits at double the Bank of England’s 2% target, and it hasn’t moved decisively downward since last November,” Laith Khalaf, head of investment analysis at AJ Bell, said.

“Combined with inflation-busting pay growth and low levels of unemployment, there’s simply no impetus for a rate cut right now,” he added.

Excluding bonuses, annual wage growth slowed to 6.1% in the three months to January, from 6.2% previously. Meanwhile, the unemployment rate rose to 3.9% from 3.8%, reversing a dip in the final quarter of 2023.

Paul Dales, chief UK economist at Capital Economics, said the consumer prices index reading of 3.4% “probably won’t make the Bank of England sound any more dovish when it leaves interest rates at 5.25% tomorrow”.

But he added: "In April, we forecast CPI inflation will plunge to 1.7% (BoE 1.9%) and, more strikingly, while the Bank thinks it will rebound to 2.7% by August, we think it will fall close to 1%.

Read more: When will interest rates fall – and what should you do?

"From April, CPI inflation in the UK will be comfortably below inflation in the US and euro-zone.

"That may prompt the Bank of England to starting cutting interest rates in the summer (perhaps in June) and inflation of 1% may force it to reduce rates to 3% next year rather than to 4% as expected by investors."

Deutsche Bank chief UK economist Sanjay Raja said: “Given weaker growth, weaker inflation, and weaker pay data, we think an 8-1 vote tally now looks more likely — with external MPC member [Swati] Dhingra voting for a rate cut.

“For now, we stick to our May call for the first rate cut. But our conviction levels have fallen, especially with little signalling from the MPC on when rate cuts could begin,” he added.

Suren Thiru, economics director at ICAEW, also thinks that there will be no change on Thursday but believes interest rates are on track for a summer cut amid falling inflation.

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"With the lagged impact of earlier interest rate rises and a weak economy likely to constrain price pressures throughout this year, the Bank of England’s forecast that inflation will start drifting higher later this year looks excessively downbeat," he said

"While interest rates will be kept on hold on Thursday, these figures may drive a more dovish vote split and meeting minutes as policymakers set the scene for summer rate cuts," he added.

What to expect on Thursday

Financial markets are pricing in only a 3% chance of a rate cut this week. Traders widely expect the first rate cut to take place in the summer, either in June or August.

“We suspect the committee will lean towards waiting another until August's meeting before cutting rates, at which point it will have a fresh set of forecasts,” James Smith, developed markets economist at ING, said.

“That’s also what markets are now pricing, though we think the Bank will ultimately deliver a little more easing than investors expect this year. We expect four 25bp rate cuts in total in 2024,” he added.

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Steve Matthews, investment director at Canada Life Asset Management, said “all eyes” will be on Catherine Mann and Jonathan Haskel’s votes this week.

Mann and Haskel, opted for an increase in rates to 5.5%, while fellow external member Dhingra called for an immediate cut. The majority voted for no change.

“If both Haskel and Mann shift to hold, it could signal that a June cut is potentially on the cards. However, they retain ongoing concerns, repeated by Mann last week, over the tight labour market and UK wage growth settlements still outpacing inflation, despite it slowing again in the three months to January. The surprising inflation data from the US last week will also be front of mind,” Matthews said.

“In turn, the market will also be looking to see if more committee members decide to join Swati Dhingra, who was the first to call for an immediate cut last month. Unless we see something seismic in Wednesday’s inflation data, we still expect Dhingra to remain an outlier, with the majority of the committee wanting to see the data get very close to and stabilise around two per cent before they join the ‘cut’ party,” he added.

The Bank of England’s monetary policy committee will announce its interest rates decision on Thursday at noon.