Thoughts

May 03, 2024 | 13:10

BoE: June or August?

Economist

Jennifer Lee

Senior Economist and Managing Director
Economics

(Read more)

Jennifer Lee

Senior Economist and Managing Director
Economics

(Read more)

It’s all about the mid-year mark; that is, for the ECB and the BoE. That’s when both central banks are expected to pull the trigger on rate cuts, although the Fed’s strong hints of a delayed cut are prompting some policymakers to second-guess themselves. How far can one diverge?

But we are not at the mid-year mark yet. The BoE is not expected to change policy on May 9. The decision, however, will not be a simple one given the wide range of views on the economic landscape and how to deal with it. On one extreme is Swati Dhingra, the dove who has voted to cut rates for the last two meetings, warning that waiting to do so will be costly. (Chief Economist Huw Pill takes the opposite view… there is a larger risk from easing too early.) The prior meeting in March saw the remaining eight members of the MPC voting to hold, but don’t be fooled: three are in hawk’s clothing. Example: Jonathan Haskel points to the ratio of job vacancies to unemployment, and how it is only coming down “rather slowly”, which suggests inflation will stay persistent. Megan Greene warned that the job market is still tight and that wage and services price inflation are not consistent with a sustainable return to 2% inflation. Meantime, Governor Andrew Bailey seems comfortable with the idea of cutting rates ahead of the Fed. After all, he sees inflation “moving in the right direction”; and, while there is demand-led inflation in the U.S., it’s more than what he is seeing in Britain.

So the question is when. The labour market is loosening up: the jobless rate is at a 6-month high of 4.2%; payrolls have been down for two consecutive months, a move not seen since 2020; and wages are growing at their slowest pace in 17 months. Headline inflation is at a 30-month low of 3.2%, and core CPI is at a 28-month low of 4.2%. Even services inflation is now at a 14-month low of 6.0%… still high, but progress is being made. Finally, note that grocery store price hikes hit a 30-month low of 3.2% in mid-April, and nonfood prices at grocers fell from year-ago levels for the first time since 2021.

We look for the BoE to ease this summer… if not in June, then in August. Friday’s GDP report will help guide the decision. The contraction in the second half of last year was short-lived and we look for 1.5% annualized GDP growth in Q1. Like Canada and China, it looks like there was a growth spurt at the start of the quarter (January) while February was a little less heated. A further slowing in March could add pressure on the BoE to begin easing sooner rather than later.