Bank of England to diverge from the Fed as inflation remains cool
At a Glance
The core argument from the desk positions the Bank of England (BoE) to potentially cut interest rates by 2027, contrary to market expectations for rate hikes, as indicated by the latest analysis from **ING**. Key drivers underpinning this view are a fragile jobs market and cooling core inflation, which suggest that the current rate levels may indeed be too high for sustainable growth in the UK. Per the full note from **ING**, while markets currently price in at least three BoE rate hikes, they project at least one rate cut could occur in the next year as inflation remains subdued and labor market growth stagnates. Real wage growth has dipped to 2.8%, marking significant challenges for the BoE to maintain restrictive monetary policy in the face of deteriorating economic signals.
Key Takeaways
- 01The Bank of England may cut rates by 2027, diverging from market expectations of rate hikes.
- 02UK private sector wage growth has fallen to new lows, complicating the BoE's inflation targets.
- 03Job market instability persists, particularly in the consumer services sector, emphasizing the need for policy reassessment.
- 04Current forecasts from **ING** suggest that the UK economy is not positioned for aggressive rate hikes in the near future.
Full Analysis
What the desk is arguing
The desk believes the trajectory of the Bank of England's policy will diverge sharply from that of the Federal Reserve, in light of the indicators pointing towards a softer UK economy. Per the full note from ING, the analyst James Smith emphasizes that cooling inflation and a fragile jobs market are likely to compel the BoE to consider rate cuts sooner than the market anticipates.
Importantly, the UK’s employment data illustrates that while some sectors show resilience, the broader trend indicates layoffs are persisting, particularly in consumer services where payroll declines exceed 3% annualized. This backdrop leads to wage growth near the 3.25% threshold that the BoE considers optimal for their 2% inflation target, further complicating their monetary policy decision-making process.
Where it sits in our coverage
The consensus target for GBP/USD is pegged at 1.075, with projections ranging between 1.04 and 1.12. Notable firms providing forecasts include:
The desk's expectation for rate cuts aligns closely with the perspectives of jpmorgan, positioning itself on the upper end of the provided range, while diverging significantly from bofa, which maintains a more bearish outlook.
How other firms see it
Most aligned firms, including jpmorgan, see potential for a more dovish BoE stance, although bofa holds a contrary viewpoint suggesting the central bank may tighten further. This split indicates varying degrees of confidence about the UK economic recovery and inflation trajectory compared to the US.
Related currency pairs to monitor include GBP/USD and EUR/GBP as movements in these markets could highlight shifts in market sentiment towards the BoE's policy direction.
What the calendar says
With no imminent high-impact events for the UK in the upcoming month, the focus will hinge on how the market reacts to ongoing labor market reports, which could provide additional data points ahead of the BoE's next scheduled announcements.
Market Implications
Traders should closely monitor the GBP/USD level around 1.075, particularly as labor market reports unfold, which could drive the market toward reassessing the BoE's interest rate outlook. Any signs of a further deterioration in wage growth or employment could signal a shift in market positioning toward GBP weakness.
From the original
Articles Bank of England to diverge from the Fed as inflation remains cool Published 11:35 United Kingdom Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download Contrary to market pricing, we think the combination of a fragile jobs market and cooling core in
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4 itemsCool UK jobs market questions need for rate hikes
The UK's job market continues to show signs of weakness, raising questions about the necessity for interest rate hikes from the Bank of England (BoE) in the near future. Per the full note from ING, sustained low levels of private-sector hiring and wage stagnation suggest that any rate hikes might be pushed back to 2026, contingent on unexpected spikes in energy prices. With the latest figures showing a 1.1% growth in payrolls on a three-month annualized basis, the outlook remains cautious amidst ongoing reductions in consumer-facing jobs. Consequently, the desk believes the BoE is unlikely to change rates this year and might begin cutting them by spring 2027, reflecting a hesitant outlook on growth amidst job market stagnation.
Benign UK jobs market weakens the case for rate hikes
The desk posits that ongoing weakness in the UK jobs market significantly mitigates the case for immediate rate hikes from the Bank of England (BoE). Per the full note from ING, with private sector hiring stagnating and wage growth remaining elusive, it's likely that the BoE will maintain current rates unless energy prices surge unexpectedly. The unemployment rate remains steady at 4.9%, yet the considerable disparity between public and private sector employment growth raises concerns about economic resilience. With no major shifts anticipated on the calendar, market positioning in GBP pairs may remain subdued as traders await further data on inflation and growth prospects.