Issue of the week: all eyes on the Bank
The timing of rate cuts has political implications, but the market impact will be greater
At the start of the year, this week’s meeting of the Bank of England’s monetary policy committee was “circled in red on the calendar as the likely start of rate cuts”, said Andy Silvester in City AM. “Things changed.” The consensus in the City ahead of this week’s meeting was that, barring a complete shock, the Bank would hold rates again at 5.25%. It’s been a whirlwind ride for traders trying to divine the next move, said Kate Beioley on FT.com. Earlier this week, bets against the pound reached a 16-month high – suggesting “investors now expect the BoE to cut earlier and faster than the Federal Reserve”, which is struggling with sticky inflation. The earlier assumption that the central banks would move in lockstep has been rethought. Traders now reckon there’s a “near-50% chance” the BoE will join the European Central Bank, which has signalled it will begin cutting in June.
“The BoE turns at the pace of a supertanker,” said Marcus Ashworth on Bloomberg. But a signal that “lower borrowing costs are coming” is important for the UK economy. The ECB’s anticipated move on 6 June would “provide useful cover for a BoE easing a fortnight later”. It makes sense “to tailgate” euro rates: the two economies – benefitting from disinflation but struggling with growth – have much more in common than either has with the “relentless” US economy. Ideally, Bank governor Andrew Bailey would lead the charge, said Alex Brummer in the Daily Mail. With a general election pending, it would certainly suit the Government. But Threadneedle Street won’t want its independence to look compromised. The Bank’s “decisions over the next few months have more of a political angle than at any time I can remember since it was given independence in 1997”, said David Smith in The Sunday Times. But would “a couple of rate cuts” between now and the election really make much difference in terms of “suddenly sparking the economy into life”? I doubt it.
Foreign exchange markets will be most affected by the timing of these rate cuts, said Katie Martin in the FT. The old currency traders’ adage – “buy dollars, wear diamonds” – certainly looks like a decent bet this year. But strain from the stronger dollar is already “spilling over in Asia and emerging markets”. In Japan, the dollar is trading at levels not seen since the 1980s and the euro is hovering at around $1.07 – its weakest in two decades. Barclays thinks a second Trump presidency, with new trade tariffs, “could push the exchange rate down towards parity”. It’s hard to argue that “the US should let inflation rip higher and cut rates”. But the dollar is fast becoming “a source of broader market volatility”.