The Zhitong Finance App has learned that the Bank of England will announce the interest rate decision tonight. Economists and markets expect the Bank of England's monetary policy committee to keep the benchmark interest rate unchanged at 5.25%. Bank of England Governor Bailey will hold a press conference after the interest rate decision is announced. At that time, it may send a stronger signal to the market, suggesting when the Bank of England can lower the benchmark interest rate from its highest level in 16 years.

Bailey's previous speech already reflected his shift to a dovish stance. As a result, Bailey may provide the market with more clarity on whether he expects to begin easing policies at the June or August policy meetings. However, Bailey faced differences within the Monetary Policy Committee on when to take action. On the eve of the British election, the central bank governor is still facing increasing political pressure. British Chancellor of the Exchequer Hunt mentioned the possibility of cutting interest rates several times, saying that this would give voters a “feel-good factor.”

Monetary Policy Committee differences

Although most of the nine members of the Bank of England's monetary policy committee are expected to vote to keep the policy unchanged, more dovish opponents may join Swati Dingra in supporting interest rate cuts. Bank of England Deputy Governor Dave Ramsden is considered the most likely to join Swati Dingra's voting camp after showing dovish tendencies in a recent speech.

The meeting is likely to highlight the serious differences of most people over the timing of future interest rate cuts. Policymakers such as Catherine Mann, Jonathan Haskel, and Megan Greene all said they were unwilling to support rapid interest rate cuts, citing strong wage growth and service sector inflation.

Providing guidelines

Since the March meeting, Bailey and Dave Ramsden's dovish remarks have sparked speculation that the Bank of England may start cutting interest rates in June or August. Both recently distinguished the UK from the resurgence of rising inflation in the US, and compared the situation in the UK to the Eurozone. The market anticipates that the ECB will start cutting interest rates next month.

In March of this year, the Bank of England's Monetary Policy Committee added new wording, admitting that even if interest rates are cut, the policy may remain restrictive. If the Bank of England wants to prepare the market for interest rate cuts in June, the central bank may take further action on Thursday. Although some economists believe this may cause the Monetary Policy Committee to indicate in its guidelines that they are inclined to cut interest rates “within the next few months,” other economists believe that the Monetary Policy Committee will be more cautious in its wording.

UBS analyst Anna Titareva said, “We believe that if the Monetary Policy Committee sees June as a possible time to cut interest rates, it may be necessary to outline more evidence to be seen until June at Thursday's meeting.”

Inflation and growth forecasts

Another clue to the Bank of England's thinking will come from the latest inflation forecasts. If the Bank of England believes that the market is too cautious in predicting the timing and scale of future interest rate cuts, it can indicate this by showing a target inflation rate of less than 2% in the next few years.

The Bank of England is also likely to raise its growth forecast after the beginning of 2024 with stronger economic growth than expected. Policymakers had expected the UK's GDP to grow at only 0.1% month-on-month in the first quarter, but economists believe that the data released on Friday would show a 0.4% month-on-month growth rate of the UK's GDP in the first quarter. Furthermore, according to some business surveys, the economic growth momentum continued into the second quarter.

Bank of America analyst Ruben Segura-Cayuela said, “We expect the Bank of England's new forecast to show slightly better economic growth and a more encouraging inflation trajectory.”

Market expectations

If the Bank of England's guidelines or predictions are dovish, bond traders may increase their bets on the Bank of England cutting interest rates earlier. The money market currently predicts that the Bank of England will start cutting interest rates in August, and believes that the possibility of cutting interest rates in June is 40%. There are a total of 25 basis point interest rate cuts this year.

Matthew Landon, global market strategist at J.P. Morgan Chase Private Bank, said: “'It's still too early, but it's getting approach'. This is the message we expect the Bank of England to deliver tomorrow.” “The strong start of the UK economy this year makes it possible for the Bank of England to cut interest rates for the first time in August, but we would be surprised if Bailey did not consider cutting interest rates in June at all.”

Any sign that the Bank of England cut interest rates as early as June could put pressure on the pound and boost British bonds. Earlier this year, as traders no longer bet that the Bank of England will cut interest rates as many as 6 times in 2024, UK bonds were sold off, and the yield on two-year British Treasury bonds, which are sensitive to monetary policy, was around 4.3%.

Quantifying austerity

Although the Bank of England will not make a decision on the future of quantitative austerity until September, there is growing speculation that the Bank of England may stop downsizing later this year. The Bank of England is currently reducing its holdings of UK government bonds by £100 billion a year, including a mix of actively selling and allowing bonds to expire.

Economists believe that as the Bank of England begins to cut interest rates, it may end active sales later this year. Sanjay Raja, chief British economist at Deutsche Bank, warned: “Active quantitative austerity may exacerbate the tightening of the financial environment, which runs counter to the Bank of England's key monetary policy leverage.”