50/50 Odds Bank of England Cuts Interest Rates in May, Says Deutsche Bank

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A leading investment bank says there is a 50/50 chance the Bank of England cuts interest rates in May.

Deutsche Bank says the Bank of England is now less divided on monetary policy, and "this, we think, opens the door more firmly for a Q2-24 rate cut," says Sanjay Raja, Senior Economist at Deutsche Bank.

The call comes after the Bank of England's March policy update where two members dropped their previous votes to raise interest rates again, meaning eight out of nine members now believe rates are at the correct setting.

The Bank also communicated that it could cut interest rates from current levels without risking stoking inflation, judging that a substantial number of cuts would be needed to bring monetary policy back into stimulatory mode.

These two developments were interpreted by markets as a 'dovish' pivot, which boosted UK stocks and bonds but triggered a selloff in the Pound.

Money market pricing now shows investors see 80% odds that rates will be cut in June. But Deutsche Bank thinks May is in play.

"We stick to our call for a May rate cut," says Raja, "the debate around rate cuts, we think, is firming".

"Is May realistic? In our view, the MPC has indeed opened the door for rate cut in May, by explicitly noting that it would "consider the degree of restrictiveness of policy at each meeting" – a new addition to the policy statement. We will take stock of our call following the next round of data, including forthcoming MPC speeches," explains Raja.

Deutsche Bank expects the trend of declining wage and inflation momentum will very likely continue through spring.

"With real rates on the rise, some adjustment in Bank Rate will likely be warranted to maintain an appropriate degree of restrictiveness," says Raja.