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Surging Inflation Forecast Overshadows BoE Rate Decision

BoE rate decision

BoE (Bank of England) holds rate decision, revealing MPC division. Resurgent inflation forecast deters rate cuts. Markets react positively.

In a recent announcement, the Bank of England (BoE) opted to maintain its benchmark interest rates, thus revealing a split decision within the Monetary Policy Committee (MPC) regarding the future direction of rates.

MPC Split: 2 in Favor of Hike, 6 Hold, 1 Advocates for Cut

The MPC, responsible for the Bank’s crucial decisions, exhibited an unexpected division in its latest vote. While six members opted to maintain the current interest rates, two remained steadfast in favor of another hike. Swati Dhingra, a traditionally dovish member, broke ranks and voted in favor of the first-rate cut for the Bank of England.

Surging Inflation Forecast Overshadows BoE Rate Decision

Resurgent Inflation Forecast Dampens Rate Cut Expectations

A key revelation from the monetary policy report was the anticipation of inflation reaching the target in Q2 of the current year. However, this positive outlook is tempered by the forecast of inflation gaining momentum and surpassing the target until the end of 2026.

Notably, the 2-year Consumer Price Index (CPI) forecast rose to 2.3%, a notable increase from the November estimate of 1.9%, emphasizing the potential risk of a second wave of inflation.

Three Conditions for Rate Cuts Show Progress

The Bank of England consistently considers the labor market, private wage growth, and general services inflation when contemplating interest rate adjustments. While services inflation is expected to rise to 6.6% by the end of the year before decreasing towards 5% in Q2, wage growth is predicted to continue progressing, dropping to 4% by the end of the year compared to the previous forecast of 4.25%. The Bank remains cautiously optimistic about the easing of unemployment, albeit at a slower pace than initially anticipated.

Market Response: Sterling, 2-Year Gilt Yield, and FTSE React Positively

Following the announcement, the market exhibited a positive response. Sterling experienced an uptick as expectations of rate cuts diminished. Similarly, the 2-year Gilt yield increased, and the FTSE 100 participated in the post-MPC advance. These market reactions suggest confidence in the BoE’s decision to maintain the status quo and reflect a temporary easing of expectations for future rate cuts.

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