Above: File image of Governor Andrew Bailey. Image: OeNB/Gruber. Reproduced under CC licensing.
The Bank sees increasing reason to signal it can step up the pace of interest rate cuts.
The British Pound could weaken if the Bank of England indicates it wants to speed up the pace it cuts interest rates.
The Bank will cut interest rates by 25 basis points further next week and signal where they will go in the coming months.
It is this guidance that matters most for the Pound which is currently valued at levels that assume the Bank will cut rates once a quarter, as it has done so throughout the current cycle.
But a rising Pound, falling gas prices and fears of rising employment amidst weak economic survey data could provide the Monetary Policy Committee the ammunition to quicken the pace.
"What is perhaps more significant for a UK economy highly (negatively) geared to the gas price is the 2025 natural gas curve is now 20% lower than the level conditioned for the last inflation forecast back in February. This, lower oil prices, and a stronger GBPUSD all tee up a considerably more dovish Monetary Policy Report," says Simon French, Chief Economist & Head of Research at Panmure Liberum.
All else equal, any surprise that hints at a faster approach would trigger weakness in the Pound, potentially leading to a deeper pullback from recent highs in the Pound-to-Dollar exchange rate and undermining a growing rebound in the Pound-to-Euro.
PMI data for April points to a sharp fall in activity as tax rises and minimum wage increases bear down on businesses. The S&P Global composite PMI fell to 48.2, putting it below 50, which marks the watershed between contraction and expansion.
On Monday, forecaster EY Item Club says it is downgrading UK GDP targets for 2025 to 0.8% y/y from 1.0%. It slashes its forecast for 2026 to 0.9% from 1.6%, indicating the Bank of England's own forecasts might have to be adjusted sharply lower.
Any GDP and inflation forecast reductions in the Bank's Monetary Policy Report - released alongside the policy decision - would also signal the Bank now has scope to accelerate the pace it cuts rates.
Bank Won't Stymie Pound's Rebound: Barclays
Interest rate cuts would underpin economic growth as it should lower the cost of borrowing for customers and consumers, thereby shoring up employment and the economy.
However, the obvious impediment to the Bank's desire to cut interest rates is the UK's rising inflation rate, and some analysts argue this will inevitably constrain the Bank's ambitions on interest rates.
In its February 2025 Monetary Policy Report, the Bank forecasted that UK inflation would temporarily rise to a peak of 3.7% in the third quarter of 2025, up from 2.75% in the previous estimate.
The above chart from Nomura is instructive in that it shows momentum in core inflation is picking up again.
The Bank's mandate is to bring inflation back to 2.0% on a sustained basis, something it has failed to do. Instead, inflation is set to rise further in the coming months, which would suggest the Bank is going against its own mandate by cutting interest rates and signalling it will cut some more.
An evergreen belief that inflation will fall further out in the forecast period (i.e. one to two years ahead) has for a long period characterised the Bank's forecasts, offering it cover to cut interest rates despite evidence it is failing in its mandate.
However, there is a risk that these predictions become untenable, limiting the scope for the Bank to indicate an 'easier' monetary policy.
FX analysts at Barclays think that still-elevated wage growth and services inflation continue to point to a relatively more shallow BOE cutting cycle.
"We expect the pound's rebound to extend," says Barclays.