Last week’s BOE meeting was a bit of a surprise to the markets. This week we get a series of key data points to see if the trend left by the rate cut will persist. Traders are looking at a slightly more hawkish central bank in London, but the upcoming data might provide a different picture.
The consensus up until last week’s meeting was that the BOE was going to step up its rate cutting through the rest of the year. Two more cuts were expected over the course of the next three meetings, in fact. That still remains the outlook, but the consensus has become more shaky. The question now is whether the upcoming GDP numbers as well as employment figures will reassure markets about the accelerated downward trajectory.
The Surprise at the BOE
What caught markets off guard at the last meeting was the three-way split in the vote, as well as the switch back of Catherine Mann. Mann had made the case for stronger moves from the BOE after the last meeting, but now she voted to keep rates unchanged. That meant she went from being perceived as an ultra dove back to being seen as an ultra hawk. Being joined by another colleague that also voted for a stay suggested that there was some resistance to the idea of accelerating rate cuts.
On the other hand, the disagreement might not be due to the trajectory, but the timing. In the end, the BOE will end up in the same place, it’s just a matter of how the cuts are spaced out. That seems to be the theory that the market is working under at the moment. So, anything that shows a stronger economy or more persistent inflation could shake up the market and give the pound a boost.
The Issue for the BOE
Britain’s central bank does want to cut rates, but keeps being stymied by high inflation which it attributes primarily to a light labor market. With businesses competing with each other to hire wages keep going up faster than inflation. That means Britons have more disposable income that they can use to increase demand and pull up prices.
Signs that the labor market is starting to decompress would give the BOE more room to ease. The March UK unemployment rate is expected to stay unchanged at 4.4%, a sign of continued tightness. But there could be a bit of a glimmer there as average hourly earnings (including bonus) are expected to grow at a slightly slower pace of 5.7% compared to 5.9% previously.
It Might Not Matter In the End
What ultimately drives inflation, however, is the economy. Without growth and the government keeping to its spending limits, then inflation would come down regardless of the labor market. In fact, if the economy slows enough, that should put an end to labor market tightness. If the British economy keep surprising to the upside, there won’t be much room for the BOE to ease, however.
The first look at UK Q1 GDP is expected to show that the economy accelerated to 0.6% growth from 0.1% in the final quarter of last year. However, the annual rate is seen slipping to 0.9% compared to 1.5% prior as the good first quarter of 2024 rolls off. March GDP growth is expected to fall back to 0.1% from 0.5%, suggesting the economy could be slowing from the surprise results of the first two months.
