First MPC meeting of the year
The Bank of England’s (BoE) Monetary Policy Committee has cut interest rates by a quarter point, from 4.75% to 4.5%.
Seven MPC members voted in favour of the interest rate cut, while two preferred a 50bps snip.
The Bank argued that over the past two years, there has been a “substantial progress on disinflation […] as previous external shocks have receded and as the restrictive stance of monetary policy has allowed the MPC to withdraw gradually more degree of policy restraint”.
BoE’s decision followed a drop in the inflation rate from 2.6% in November to 2.5% in December last year, with CPI services inflation having declined substantially since the last MPC meeting in December, from 5% to 4.4% over the same period.
Earlier this week, markets priced in a quarter-point cut from the BoE, but economists and investors warned that Donald Trump’s unpredictability could threaten the future of the monetary policy roadmap.
“Fundamentally, Donald Trump’s policies are inflationary and what we do not know at this stage is just how extreme or not these changes might be and therefore the impact of them. This complex dynamic is why a change in the base rate is on a knife edge,” said Ashbridge Partners managing director Mark Ashbridge.
Omnis Investments senior investment strategist Patrick O’Donnell said that the “MPC remains in the difficult position”.
“Uncertainty remains high, inflation remains above target, and forecasted to stay there near-term, but recent survey data shows that employment and growth data are soft,” O’Donnell added. “BoE models will project that more rate cuts are required to prevent a significant rise in unemployment and an inflation undershoot.
“In our view, the risks are tilted to more rate cuts being delivered than what is currently priced,” he continued. “However, the primary driver of markets in the near term is going to be policy announcements and social media posts coming from the other side of the pond.”
Sorin-Andrei Dojan (Professional Adviser)