As expected, the Bank of England (BOE) kept interest rates on hold at 5.25% in their May decision.
The official statement noted that:
- Underlying inflationary pressures in the euro area have continued to moderate somewhat since the start of the year
- U.K. demand growth is expected to remain weaker than potential supply growth, so a margin of economic slack is expected later this year until 2025
- Service sector consumer inflation has declined but remains elevated
- CPI inflation is expected to return to close to the 2% target in the near term but could pick up in the latter half of the year due to the unwinding of energy-related base effects
- Monetary policy will need to remain restrictive for sufficiently long to return inflation to the 2% target sustainably in the medium term
The minutes of the MPC meeting revealed that two dovish members voted to cut interest rates by 0.25% this time instead of the consensus of a unanimous vote to hold. This also reflects a more cautious view compared to the earlier vote of 8-1.
Link to official BOE statement & MPC minutes for May 2024
During the press conference, BOE Governor Bailey clarified that the central bank is not yet at the point of cutting interest rates. However, he also hinted that easing might be necessary in the coming quarters and that cuts could be “more substantial” than what markets expect.
Bailey explained that the current restrictive monetary policy is effective for now but that he expects a potential uptick in inflation later in the year.
Later in the day, BOE member Pill underscored these relatively cautious outlook in citing that there is increased confidence in starting to ease policy restrictions soon but that it’s not yet time to act.
Market Reactions
British Pound vs. Major Currencies: 5-min
Overlay of GBP vs. Major Currencies Chart by TradingView
Sterling staged a sharp drop across the board upon hearing of a more dovish than expected BOE decision, as two dissenters voted to ease monetary policy right then.
The U.K. currency managed to cap off its losses and pull higher during Bailey’s press conference, as he reassured that it isn’t time to cut rates just yet. Interestingly enough, the pound continued to recover, even after Bailey hinted that future cuts are likely in the coming quarters and that these might be more substantial than anticipated.
GBP/CAD was able to climb close to pre-BOE levels while GBP/USD kept cruising higher, as it got an extra boost from weaker than expected U.S. initial jobless claims data.
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