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BoE in wait-and-see mode, wage growth key to rate outlook

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By Craig Erlam  

The Bank of England left interest rates unchanged on Thursday at 5.25%, as expected, with the vote widening slightly but remaining very close.

The fact that the vote remains close highlights how uncertain the outlook remains in the view of the central bank’s Monetary Policy Committee and how, as Governor Andrew Bailey reaffirmed during the press conference, the risks to inflation are still to the upside.

That said, based on its forecasts, which show inflation falling below 2% over the forecast period, a rate cut is seemingly the more likely next move. Of course, these forecasts are always subject to change and often are, especially in such a challenging and uncertain environment.

Still, it looks clear at this point that the BoE is, like many of its peers, done with the tightening cycle and it’s now a case of how long it remains at the peak.

Of course, that’s also extremely important at a time when rates are restrictive, and potentially significantly so.

Softer than peers

The BoE is persisting with the language of “sufficiently restrictive for sufficiently long”, which isn’t as helpful as they may think. But it does come across softer than some of its peers, which may again suggest it’s not as confident that rates will stay at the peak as long as others.

Or perhaps I’m just reading too much into these statements like everyone else.

A final point that was very evident during the press conference is how taken aback the MPC has been by wage growth and what that means for inflation and interest rates.

Measures of wage growth may therefore become the key data release going forward as other areas of the economy cool, but this remains stubbornly high. Lower wage growth may well be what tips the balance of the forecasts in favour of earlier rate cuts.

The British pound has been quite choppy across the initial announcement and new projections, and then throughout the press conference, but nothing has significantly changed, which suggests the day has largely unfolded as expected.

There remains considerable uncertainty and the data over the coming months could clear things up. Until then, the BoE, like its peers, is in wait-and-see mode.

 

Craig Erlam is Senior Market Analyst, UK & EMEA at OANDA

Opinions are the author’s, not necessarily that of OANDA Global Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. Losses can exceed investments.