Bank of England expected to pause rate cuts in June, UBS says

UBS forecasts the Bank of England will hold its key interest rate at 4.25% at its June 19 meeting, following a 25bp cut in May, with a likely 7-2 vote split. Despite mixed economic data, including a Q1 GDP upside surprise offset by a weaker April, and a slight overstatement in April inflation, most MPC members are expected to remain cautious. UBS projects two additional 25bp cuts in August and November, bringing the Bank Rate to 3.75% by year-end, and further easing to 3.0% in 2026, a more dovish outlook than current market expectations.

Analysis

UBS forecasts the Bank of England (BoE) will maintain its key interest rate at 4.25% during its upcoming June 19 meeting, a decision that would follow the 25 basis point rate cut initiated in May, which marked the start of the current easing cycle. The investment bank anticipates a 7-2 vote split within the Monetary Policy Committee (MPC), with members Swati Dhingra and Dave Taylor expected to advocate for a consecutive rate reduction. This anticipated hold reflects a continued cautious stance from the BoE, consistent with the more hawkish-than-expected tone observed at the May meeting, where two MPC members voted against a cut and the committee reiterated its guidance for a "gradual and careful" approach to monetary easing. The BoE's decision-making process is complicated by recent mixed economic indicators: first-quarter GDP growth surprised positively at 0.7% quarter-over-quarter, but April's GDP figure showed a -0.3% month-over-month decline, exceeding expectations. Furthermore, April's year-over-year inflation came in at 3.5%, a figure later revised down by 0.1 percentage point due to a calculation error by the Office for National Statistics. UBS projects that the May inflation print, due just before the BoE meeting, will show a decrease to 3.3%. Despite this anticipated improvement in inflation, UBS believes most MPC members will opt to keep rates unchanged in June. Looking further ahead, UBS projects two additional 25 basis point cuts in August and November, aiming for a Bank Rate of 3.75% by the end of 2024, and expects three more cuts in 2026, leading to a terminal rate of 3.0%, which is a more dovish outlook than currently priced by the market.

Key Decisions for Investors

• Given the expectation of a rate hold in June and the BoE's 'gradual and careful' easing guidance, investors should anticipate continued monetary policy caution in the near term, potentially leading to range-bound trading for UK assets sensitive to interest rates.
• Investors should closely monitor the upcoming May inflation data, as a significant deviation from UBS's 3.3% forecast could influence the BoE's immediate policy stance and trigger market volatility.
• Considering UBS's projection for a cumulative 50 basis points of cuts by year-end 2024 and a terminal rate of 3.0% by 2026, which is more dovish than current market pricing, investors may explore opportunities aligned with a potentially faster-than-expected easing cycle in the medium term, such as re-evaluating positions in UK gilts or sterling.