Bank of England Outlook Today: Rates on Hold, Forward Guidance Crucial for Pound Sterling

February 1, 2024 - Written by Tim Boyer

STORY LINK Bank of England Outlook Today: Rates on Hold, Forward Guidance Crucial for Pound Sterling

The Bank of England (BoE) Monetary Policy Committee (MPC) will announce the latest interest rate decision on Thursday February 1st.

• There are very strong expectations that interest rates will be held at 5.25% at the meeting.


• It will be a major surprise if there is a decision to raise or lower interest rates.


• The rate split and forward guidance will be crucial for the Pound reaction.


• Investment banks expect some or all members who backed a rate hike in December will change tack.


• The Pound will strengthen initially if there are again votes for a rate hike.


• The bank will also release the update Monetary Policy Report (MPR) which will contain updated forecasts for growth and inflation. Inflation forecasts will be cut.


• Forward Guidance from the bank will be very important.


• The crucial element for markets will be the extent of any shift in market pricing for the first interest rate cut and the number of rate cuts priced in by the end of 2024.


• A forceful rejection of market pricing would provide Pound support.


• Federal Reserve and ECB rate expectations will also be a key element for the Pound.

Markets remain very confident that the Bank of England will cut interest rates this year.

MUFG noted; “The market is currently positioned for 100bps of rate cuts this year with a 50/50 probability of the rate cutting cycle commencing in May.

According to the latest Reuters poll just over half of investment banks expect a first rate cut in the second quarter of 2024.

Shifts in these expectations will be crucial for the Pound after the BoE meeting.

ING summarised its position; “Expect the BoE to drop the pretence that it could hike rates again but to continue signalling rates will stay restrictive for an "extended period". With services inflation and wage growth to remain sticky in the near term, we think August is the most likely starting point for rate cuts.”

According to BNP Paribas; “The Bank has a “difficult needle to thread. The MPC will want to change tack and deliver a more dovish tone but stop short of signalling rate cuts or endorsing current market pricing.”

Philip Shaw, chief economist at Investec, agreed. “The Governor may well push back against the degree of market expectations of lower rates, while at the same time acknowledging decent progress on lowering inflation.”

Forward guidance will inevitably be a key element.

ING notes the most recent forward guidance from December:

• Policy needs to stay “sufficiently restrictive for sufficiently long.”


• It’s likely to stay restrictive for “an extended period of time.”


• “Further tightening” is required if evidence of “more persistent inflationary pressures.”

According to ING; “We think the baseline assumption going into this meeting is that the last of those sentences gets dropped.”

MUFG considers that the tightening bias the most likely to be dropped. It added; “Restrictive policy it could be argued will be required and would still exist after a series of rate cuts so that could feasibly remain.”

The vote split will be important for expectations and the Pound reaction.

ING expects that the three hawks who'd been voting for a rate hike in December finally throw in the towel, given the recent run of inflation data. It also noted a tail-risk that Swati Dhingra, known to be the most dovish committee member, votes for a rate cut, though its base case is a unanimous decision to keep rates unchanged (6-3 previously).

According to ING; “A hawkish surprise is, therefore, a statement that looks much the same as December’s, with at least one or two committee members voting for a further rate hike. A dovish surprise would see the Bank remove or water down the sentence on how long policy needs to stay restrictive.”

MUFG sees a bias towards a more dovish vote split; “There’s a strong chance two and possibly all three abandon their calls for a rate hike. Catherine Mann as the most hawkish could maintain that call. On the dovish side there is a chance that Swati Dhingra votes for a cut.”

According to Investec’s Ellie Henderson; "Whether the progress in actual inflation is enough to convince the three hawks on the committee that voted for a hike in the last meeting that upside inflation risks have sufficiently subsided is another issue."

A removal of votes for higher rates would leave the Pound vulnerable unless there is forceful and hawkish guidance.

Danske Bank noted; “Overall, we expect the MPC to deliver a dovish tilt to its guidance coupled with a downward revision to its inflation forecast and more explicitly to remove its tightening bias.”

It added; “We expect the BoE to prime markets for an upcoming rate cut at the May meeting while delivering the first cut of 25bp in June and subsequently 25bp cuts in the following quarters, totalling 75bp of cuts for 2024. This is less than current market pricing of 100bp.”

Nevertheless, it still sees the Pound losing ground with EUR/GBP strengthening towards 0.89 over the medium term. (1.1235 for GBP/EUR).

Rabobank has adjusted its rate forecast; “the wider data flow should eventually persuade the BoE that it could ease its policy stance from the summer onwards. We now see a first cut in September instead of November.” Rabobank still sees scope for GBP/EUR to strengthen to 1.19 this year amid Euro-Zone woes.

ING considers that the potential for tax cuts, sticky services inflation and composite PMI readings above 50 could well mean that EUR/GBP traces out a 0.85-0.87 range through the first half of this year. (1.1495 - 1.1765 for GBP/EUR)

ING sees scope for strong GBP/USD gains to 1.2850 if there is hawkish rhetoric and votes to raise rates. Otherwise, it is liable to be held below 1.2700.

Within the MPR, a substantial change in growth forecasts is unlikely, but the BoE could be slightly more positive given recent business surveys. Inflation forecasts are likely to be downgraded.

MUFG considers that a notable revision is likely with the timescale for 2% inflation brought forward by at least 12 months.

The bank still expects the BoE to push back against rate-cut speculation; “With wage growth slowing but still elevated, the BoE seem highly likely to try and inject caution into market interpretations of the possible more dovish changes.”

It added; “Strong concerns expressed about sticky wage growth could see the market price out further the probability of a May cut and quickly see the market push back to June or even August.

On FX rates, MUFG commented; “We continue to hold a USD bullish bias and if GBP is to respond to a less dovish than expected BoE policy update, we see scope for EUR/GBP to extend the current move to the downside. EUR/GBP is approaching the 2023 low of 0.8493 and a break of that level should open up a more rapid move back to the 0.8400-level that last traded in August 2022. (1.1905 for GBP/EUR).

According to Danske; “Large base effects from energy prices last spring are set to bring headline inflation back to 2% during the first half of the year.”

Danske added; “In our base case we expect EUR/GBP to move higher on softer guidance and updated projections. Overall, we see relative rates as a negative for GBP and see the recent rebound as attractive levels to sell GBP. We continue to forecast EUR/GBP towards 0.89 and stay short GBP/USD.”

According to Nomura head of G10 spot trading Antony Foster; “I expect the pound to perform relatively well, so long as BOE expectations remain where they are, but as soon as this rhetoric turns, it should suffer.”

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TAGS: Pound Sterling Forecasts