Bank of England Preview: slight dovish shift in the MPC amid rapid disinflationary trends.

Summary:

- The Monetary Policy Committee (MPC) is expected to maintain the Bank rate at 5.25%, monitoring incoming data for future policy guidance.

- A potential shift towards a more dovish stance may be indicated by MPC's voting distribution, with expectations of a vanishing hawkish bias at the May meeting.

- The market anticipates rate cuts totaling 63 basis points by December, potentially beginning in August, with a 38% chance of a rate cut in June.

- Ten-year Gilt yields are likely to remain rangebound until disinflationary trends are confirmed.

What to expect from this week’s Bank of England Bank rate decision?

The Monetary Policy Committee (MPC) is anticipated to maintain its stance from February, keeping the Bank rate steady at 5.25% while closely monitoring incoming data to guide future monetary policies.

However, a potential shift towards a more dovish outlook may be indicated by the MPC's voting distribution. In February six MPC members opted to maintain rates, while two voted for a hike and one for a cut. It's expected that at this week’s meeting, the hawkish bias might soften further, with Mann remaining the sole advocate for a rate hike, and Dhingra leaning towards a rate cut.

Recent data from the last monetary policy meeting suggests a slight easing in price and wage pressures. The unemployment rate saw a slight uptick from 3.8% in December to 3.9% in January, while wage growth unexpectedly slowed, with the 3-month average earnings dropping to 5.6% from 5.8% in January, contrary to the consensus expectation of 5.7%.

Although February inflation data will be released one day before the BOE meeting, projections continue to indicate strong disinflation momentum, with headline CPI expected to decrease to 3.5% from January's 4%, and core CPI to fall to 4.6% from 5.1%. Consensus forecasts still suggest a drop in inflation to 1.8% in the second quarter of the year, driven by base effects from last spring's energy prices. Concurrently, expectations persist for a modest recovery in the UK economy, supported by expansion in composite and service PMIs. This resilient growth trajectory is likely to enable the BOE to maintain its highest policy rates in sixteen years for an extended period.

It's worth noting that this meeting will not include updated forecasts or a press conference following the MPC statement release, putting the spotlight on the May meeting for economic projection updates.

Market expectations currently reflect a projection of 63 basis points of rate cuts by December this year, potentially commencing in August, with a 40% chance of a rate cut as early as June. Anticipations for a June rate cut may rise further as disinflationary trends intensify, leading to an overall expectation of rate cuts totaling 75 basis points for the year. This scenario supports a moderate extension in duration.

Ten-year yields: what’s next?

Ten-year Gilt yields may be caught rangebound between 3.95% and 4.25% until the disinflationary trend is confirmed. If ten-year yields break below 3.95%, they will find support next at 3.75%.