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Traders are pricing in two quarter-point interest rate cuts from the Bank of England this year, as policymaker Megan Greene said such moves “should still be a way off”.
International markets have scaled back their expectations of imminent rate cuts in the US and the eurozone in recent weeks. The European Central Bank is meeting on Thursday but is expected to keep rates at their all-time high.
Traders are no longer fully pricing in the first UK interest rate cut in August and now expect borrowing costs to begin to fall in either that month or September.
The two cuts they now expect for this year — one in which Prime Minister Rishi Sunak is hoping to deliver an election-winning economic turnaround — contrast with the more than six cuts markets anticipated in January.
As of Thursday morning, the interest rate swaps market fully priced in a cumulative cut by year end of around 0.5 percentage points.
Market expectations have shifted in similar fashion in the US and the eurozone, with traders in both regions slashing the number of interest rate cuts they expect this year by at least half.
But Greene, one of the more hawkish members of the BoE’s monetary policy committee, argued in the Financial Times on Thursday that investors had underestimated the risk that inflation would remain high for longer in Britain than in other advanced economies.
She also questioned market pricing that suggested the UK’s central bank would cut rates earlier and by more than the US Federal Reserve this year.
“The UK economy has faced the double whammy of a very tight labour market and a terms of trade shock from energy prices,” Greene wrote. “Inflation persistence is therefore a greater threat for it than the US.”
“In my view, rate cuts in the UK should still be a way off,” she added.
Rate cut expectations were dented on both sides of the Atlantic by unexpectedly high US inflation data on Wednesday that marked the second consecutive monthly rise.
Markets are now betting that US rate cuts may not begin until a Fed meeting just after November’s presidential election.
The shifting expectations in the US, where President Joe Biden has conceded there is “more to do” to fight price rises, are also shaping policy across the world.
Regions such as the eurozone and the UK are likely to want to limit divergence in interest rates, partly out of fear of weakening their currencies and so further stoking inflation.
In the UK, Greene has taken a more hawkish view than the majority of the nine-member MPC on several occasions since she joined the committee last August. Last month, however, she voted with most of the members to leave the BoE’s benchmark rate at a 16-year high of 5.25 per cent.
Her comments echo those of Jonathan Haskel, another MPC hawk, who cautioned in a recent interview with the FT that interest rate cuts should be “a long way off” because a near-term fall in headline inflation would not be a reliable guide to “persistent and underlying” inflationary pressures.
UK consumer price inflation fell to 3.4 per cent in February, its lowest level since 2021, and big declines in household energy bills will drag it down further in the near term.
But the BoE’s latest forecasts suggest this drop will be temporary, with domestic price pressures pushing headline CPI back above the central bank’s 2 per cent target for much of the next two to three years.
Both Haskel and Greene argue that UK wage growth and services inflation remain too high for comfort, despite recent signs that pressures in the labour market are finally easing.
However, other BoE rate-setters have offered a more upbeat view.
Andrew Bailey, the central bank governor, told the FT last month that rate cuts were “in play” at future MPC meetings. He said the committee should not wait for annual growth in wages and services prices to halve before it was willing to ease policy.
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