BoE and ECB hold rates but signal readiness to cut rates next month

Bank of England

Today’s BoE rate decision appears to have opened the door for a rate cut in June, with two members of the MPC now voting in favour of cutting rates, while updated inflation forecasts showed price pressures expecting to ease faster than in February. The MPC now expects headline consumer price inflation to slow from the current 3.20% pace in March, to 2.60% a year from now, and to fall below its 2.00% target in 2026.

BoE Governor Andrew Bailey said he is optimistic that inflation is moving in the right direction, and therefore, will be able to cut rates. In new language, the MPC said it would “consider forthcoming data releases” in determining whether “the risks from inflation persistence are receding,” placing significant importance on April's and May’s inflation and employment data.

Investors attribute a probability of around 45.00% for a rate cut in June and expect a total of 50-basis-points cuts this year, around the same as before Thursday’s announcement. Governor Andrew Bailey said, "It's likely that we will need to cut bank rates over the coming quarters and make monetary policy somewhat less restrictive over the forecast period, possibly more so than currently priced into market rates."

European Central Bank

Last month’s ECB rate decision to keep rates on hold at all-time highs was contested by a small minority of policymakers who had argued for an immediate cut. President Christine Lagarde said, “a few members felt sufficiently confident” to argue for a cut, but there was a “very, very large majority of members” who wanted to wait until at least June.

In a shift in language, the ECB said it “would be appropriate” to cut rates if underlying price pressures continued to close in on its 2.00% target “in a sustained manner.” With annual headline inflation in March slowing to 2.40% — within touching distance of their target of close to but below 2.00% — there is a growing consensus that the ECB will begin cutting interest rates at the June meeting. However, markets have been unnerved by a recent uptick in U.S. inflation data that has seen investors price in fewer interest rate cuts by the U.S. Federal Reserve and has driven reduced expectations for cuts in developed economies.

However, ECB President Lagarde once again highlighted that their decisions on monetary policy were not driven by what the Federal Reserve chooses to do. Lagarde said, “We are data-dependent, not Fed-dependent,” stating that inflation in the U.S. and eurozone were “not the same.”

Moving forward

The BoE will get two employment reports and inflation data releases before their next meeting in June. If inflation continues to slow gradually (April will see a large year-on-year decline from the energy price cap reduction) and the labour market continues to soften, there is a good chance of a rate cut. However, the BoE remains cautious with still-strong wage growth and services price inflation, which may mean that the first rate cut could be delayed, and the pace of cuts may be slower than anticipated.

With the ECB’s next meeting in just under a month’s time, the market is pricing in a 90.00% chance of a 25-basis-point cut, which aligns with the Bank’s guidance towards such a move. However, within the Governing Council, there appears to be a discernible schism regarding policy direction post-June, particularly evident among the more conservative members. The latest GDP data showed that the eurozone economy returned to growth in the first quarter, while unemployment remains at a historical low, potentially supporting the case for lowering rates gradually and avoiding reigniting inflationary pressures.