• As anticipated by consensus and current market pricing, the Bank of England (BoE) will maintain the Bank Rate at 5.25% on March 21.
• In general, the MPC will stick to its data-dependent strategy and repeat its prior communication.
• We anticipate a subdued EUR/GBP response, with a preference for upside risk.

As anticipated by consensus and current market pricing, the Bank of England (BoE) will maintain the Bank Rate at 5.25% on March 21. We predict a 7-1-1 vote split, with Mann voting for a raise and Dhingra voting for a cut, while the majority will support keeping the current course of action. Please take note that neither revised predictions nor a press conference after the statement’s release will be part of this meeting.

As a whole, the MPC will continue to rely heavily on data-dependent communication, much like it did during the February meeting. Similarly, to avoid prematurely loosening financial conditions, the BoE will exercise caution in becoming overly bullish about the inflation outlook.

Overall, data releases since the last monetary policy decision in February have indicated a generally more moderate wage and price pressure. Core and food inflation together drove a broad-based fall in inflationary velocity in January’s inflation statistics, which came as a minor surprise. The day before the meeting, the inflation for February is announced, but that will not affect how this conference turns out. The energy price shock of last spring is expected to have significant base effects, which will return headline inflation to 2% in the upcoming months.

 

As previously noted—a view that is getting more and more traction—we do not believe that inflation will develop in the UK in a way that is fundamentally different from elsewhere. Both the official labor market statistics and the KPMG/REC study on UK jobs illustrate how wage growth is continuing to ebb, supported by an increasingly tightening labor market. The MPC is still faced with a challenging growth environment since the composite and service PMIs are still in expansionary territory and indicate a minor recovery in growth in 2024 after a technical recession at the end of 2023.

Budgetary strategy. The Chancellor’s budget included some softening measures, including a 2 percent reduction in National Insurance. However, the policies are also primarily designed to strengthen the supply side, reducing the likelihood that inflation will rise. In general, the Spring Budget does not change our long-held belief that the MPC will release its first cut in June.

BoE call. At its meeting in May, we anticipate the BoE will set the stage for a rate drop, complete with revised estimates, with a 25bp initial cut scheduled for June. Crucially, it should be noted that the BoE has historically employed brief meetings to announce significant policy changes, including the first hike in December 2021, a 50 basis point boost in June 2023, and an unaltered decision in September 2023. We then project 25bp of cuts in the ensuing quarters, for a total of 75bp of cuts in 2024. For the rest of the year, markets are pricing 63bp, with the first 25bp decrease completely priced by August (chart 3).

FX. Assuming our basic scenario, we anticipate a modest reaction in EUR/GBP and minimal guidance from the MPC. In general, relative rates are alarming for the pound, and the current levels are favorable for selling the pound. We continue to be short GBP/USD and predict EUR/GBP to reach 0.88.