This Was a Hawkish Bank of England: Economist Reactions

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Money market pricing has shown investors are less expectant of an early rate cut from the Bank of England, confirming Thursday's policy decision to have landed on the 'hawkish' end of the spectrum.

Money markets responded to the Bank of England's update by scaling back May rate cut expectations to ~14 basis points of cuts, compared to around 16bps prior.

The reaction in financial markets - which included a bounce in the Pound - suggests the Bank has been successful in pushing back against market expectations for imminent rate cuts as it guards against an unwanted rebound in inflation.

"The general tone of today’s communication suggests that cuts to Bank Rate are unlikely to be forthcoming soon," says Nick Rees, FX Market Analyst at Monex Europe.

The Bank's Monetary Policy Committee (MPC) saw two members vote for another hike, an apparent ploy to warn markets against betting on premature rate cuts.

The majority voted to keep rates on hold; "we think this latest set of communications offers little meaningful change from the BoE," says Rees.

The Bank maintained guidance that "monetary policy will need to remain restrictive for sufficiently long to return inflation to the 2% target sustainably in the medium term."

Dropping this line would have been another signal that a May rate cut could be entertained.

"The updated inflation projections also indicated some unease over the scale of rate cuts priced in to the UK rate market given ongoing concerns over persistent inflation risks. While the BoE is moving towards lowering rates, market expectations for a cut as soon as in May could prove premature," says Lee Hardman, an analyst at MUFG.

Above: Inflation will fall to target but rebound, according to new projections.

The Bank said headline CPI inflation would fall to around 2.0% in April, but it would rebound through the remainder of the year and start 2025 closer to 3.0%.

"This reflects the persistence of domestic inflationary pressures, despite an increasing degree of slack in the economy," says Mathias Van der Jeugt, an analyst at KBC Markets.

The Bank also no longer sees the sharp hit to economic growth resulting from higher interest rates that it did in the past; one only needs to remember the infamous forecasts of August 2022 that showed the UK would slide into a multi-quarter recession at the start of 2023.

Such negative forecasts tend to create an urgency to cut interest rates as soon as inflation falls to target. Remove the dire growth forecasts, and the Bank has more time to watch and wait before cutting.

"Although the BoE remains at the pessimistic end of the spectrum of UK economic forecasters, compared to the previous forecast round in November, the updated projections look decidedly rosy," says Kallum Pickering, an economist at Berenberg Bank.

The updated GDP projection for this year was raised by 0.25ppt to 0.25% and by 0.50ppt to 0.75% for 2025.

"The BoE’s updated economic projections revealed that they have become relatively more optimistic over the UK growth outlook," says MUFG's Halpenny.