Financial markets are quickly throwing in the towel on the “higher for longer” narrative that central banks have been strongly pushing for months. It is true that so far this market price review has been less aggressive for the Bank of England. But with three rate cuts planned for 2024, the Bank of England is starting to sound the alarm. Gov. Andrew Bailey said in recent days that he is rejecting “assumptions that we’re talking about cutting interest rates.”
Those comments followed a reaffirmation of the Bank’s forward guidance in November, where it said it expected rates to remain restrictive for “an extended period.” Expect that narrative to be reiterated on Thursday. Our base case is a 6-3 vote in favor of leaving rates unchanged, and that matches the split vote in November.
Could the Bank go even further and formally say in the statement that markets are overpricing the 2024 easing? He has not commented in this manner since November 2022, in what was then a stressed market environment. We doubt they will do something similar this month. Policymakers may be uneasy about the recent reassessment of UK rate expectations, but central banks around the world have learned the hard way in recent years that trying to predict and commit to future policy, with relative certainty, It’s a fool’s game. The Bank will also be glad that the data at least starts going in the right direction. Services inflation came in below the Bank’s most recent forecast.
Markets may be right to assume that the Bank of England will take a little longer to kick off rate cuts than its European neighbors. But when rate cuts begin, we believe the Bank of England’s easing cycle will end up becoming more aggressive. We expect 100 basis points of rate cuts starting in August next year and another 100 basis points in 2025.