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Following the Bank of England’s (BOE) decision to maintain its main interest rate at a 16-year high, traders and investors are reassessing their predictions regarding potential rate cuts amidst signs of robust economic growth in the UK.
The anticipation surrounding any indications from the BOE has intensified as investors seek clues on the timing of rate reductions, which influence the pricing of various loans and mortgages across the nation. Market data from LSEG suggests that there is approximately a 48% probability of a rate cut in June, slightly up from Thursday’s 45%.
Economists at UBS have revised their forecast, now expecting the first rate cut to occur in June instead of August. They cited the BOE’s more dovish tone, changes in forward guidance, and comments from BOE Governor Andrew Bailey regarding the impact of increased national living wages on overall wage growth as influencing factors.
However, Bailey emphasized that a rate cut in June is not predetermined, underscoring the discretionary nature of each meeting’s decision.
The release of the latest UK gross domestic product (GDP) data further fueled discussions, revealing stronger-than-expected growth in the first quarter of 2024. GDP increased by 0.6%, exceeding the estimated 0.4% and signaling the economy’s emergence from the technical recession it entered in the second half of the previous year.
Analysts view this as a positive indicator of the economy’s resilience and its ability to withstand higher interest rates, potentially indicating persistent inflationary pressures. Despite the optimistic GDP figures, the BOE remains cautious, acknowledging elevated inflation indicators while anticipating a gradual convergence toward the 2% target in the near term.
Nomura analysts suggest that the strong GDP growth strengthens the case for maintaining restrictive monetary policy longer than currently priced in by the markets. They anticipate the BOE to delay rate cuts until August to further address inflationary concerns.
