Sterling showed little reaction to the Bank of England monetary policy committee, voting to keep interest rates on hold for the fourth consecutive meeting. The MPC stressed more evidence was required that inflation would fall to their 2% target before they would cut borrowing costs, warning upside risks to inflation still remain. In a push back to an early cut, Governor Bailey stated “we need to see more evidence that inflation is set to fall all the way to the 2% target, and stay there, before we can lower interest rates.” The 9-member panel voted to hold rates by a majority decision, with 2 members voting for an immediate hike and 1 for a cut. The Quarterly Inflation Report did reveal a sharp reduction to the Bank’s inflation forecasts, indicating a fall to below 2% in May before moving higher again, citing robust wage inflation.
More insight into the MPC decision could be revealed when BoE Chief economist Pill gives an online presentation later today on then Bank’s new forecasts and latest policy decision.
Elsewhere broader market sentiment improved dramatically, as news of a possible Israel / Gaza ceasefire late in the European session lifted US equities to new all-time highs, and caused steep falls in the price of oil, causing the US dollar to fall and “risk “ currencies like GBP to gain.
Today sees the release of the latest official Government employment report, where Non-Farm payrolls and wage growth are expected to have fallen back from the previous month readings.
Markets will be laser focused on the report given by Fed Chair Powell in his recent press conference, that weak employment would certainly bring a March rate cut into play.
*Daily move - against G10 rates at 7:30am, 02.02.24
** Indicative rates - interbank rates at 7:30am, 02.02.24
Following the US and UK both leaving interest rates on hold, markets continue to ignore the Central Banks' guidance of 3 rate cuts this year, and continue to price in 6 reductions in borrowing costs. Who will be correct? The market’s aggressive pricing is based on a belief that the global economy will continue to slow down and possibly go into recession later in the year, forcing policymakers to slash rates. With no clear guidance for the Fed and BoE, monetary policy is now firmly reliant on future economic data.
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