Bank of England Update May 2024

The Bank of England (BoE) unveiled its monetary policy summary and minutes of the Monetary Policy Committee meeting (MPC) at 12:00 pm BST on May 9th, 2024, followed by a press conference addressing the latest economic trends and monetary policy. Here are the key points:

• The BoE base rate remains steady at 5.25%, backed by a majority vote of 7–2 from the MPC.
• Two members proposed a 0.25 percentage point reduction in the Bank Rate, to 5%.
• Although inflation remains above the 2% target, there are signs of improvement.
• Service sector consumer price inflation, while still high at 6%, has declined.
• CPI inflation is expected to approach the 2% target in the short term but may rise slightly in the latter half of the year, reaching around 2.25%, due to energy-related factors normalising.
• “A change in bank rates in June is neither ruled out nor a fait accompli” – Andrew Bailey

Following the announcement, Sterling depreciated by approximately 0.35% against the US Dollar, while UK 10-year treasury yields dropped from 4.162% to 4.128%. This market reaction was largely anticipated, given the BoE’s communication indicating satisfaction with inflation trends and expectations of lower interest rates in the near future, potentially impacting Sterling, especially against the US Dollar.

The BoE’s projection of CPI inflation at 1.9% in two years’ time and 1.6% in three years suggests that interest rates may be lowered soon if these projections hold. Additionally, the implied trajectory for the Bank Rate, declining from 5.25% to 3.75% by the end of the current forecast period, is favorable for borrowers, potentially boosting economic activity and growth. However, there is a risk that if the BoE cuts rates too soon or too rapidly, it could lead to a resurgence in inflation, requiring higher rates for an extended period. This emphasises the importance of the BoE’s cautious approach to monetary policy adjustments.

Moreover, there are other external risks, such as conflicts in the Middle East and Ukraine, which could unexpectedly impact inflation in the UK. These geopolitical tensions may disrupt supply chains, increase energy prices, and create uncertainty in financial markets, posing challenges for the BoE in maintaining price stability while fostering economic growth. Hence, the BoE must remain vigilant and adaptable in its policy decisions to effectively navigate the dynamic economic landscape.

Looking ahead, the June meeting holds greater significance as more economic data points would have been released by then, allowing the BoE to adopt a more data-driven approach. If inflation figures continue to decline and services inflation eases, the BoE may consider reducing rates in June. Governor Bailey’s statement in the press conference, “a change in bank rates in June is neither ruled out nor a fait accompli,” signals to the market that rates could potentially be adjusted in June, contingent on the data.

The article above is for informational purposes only and should not be considered investment advice. Readers should conduct their own research and consult with a qualified financial advisor before making any investment decisions. The information provided is based on current market conditions and political events, which are subject to change and may impact financial markets. The author and publisher are not responsible for any losses or damages that may result from the use of this information.