UK Base Rate cut of 0.70% expected following inflation figures

Macro Commentary

The Bank of England held rates at their 16-year high of 5.25% despite the fall in headline inflation, which dropped from 4% to 3.4%, its lowest reading since 2021. Forecasters expect inflation will drop to its 2% target in the coming months, although Bank officials remain particularly focussed on wage growth. The Bank vote was split two ways, and the committee remains extremely cautious of cutting too early.

Markets continue to predict the first cut will come in August, though June remains a possibility, with a cumulative 0.70% of cuts currently priced for this year.

The US central bank also kept policy on hold, with chair Powell reiterating the need for inflation to drop towards target on a sustainable basis. The Fed continues to project three rate cuts this year.

The European Central Bank continues to indicate they will hold rates until June, when they expect to have enough evidence to begin an aggressive rate cutting cycle, with up to 1% of cuts currently priced in as the economic outlook remains bleak, with Germany in particular lagging.

On the exchanges, currencies remain volatile within recent ranges, lacking any real conviction or trend. GBP/USD remains around 1.2600 having dropped from its recent yearly high towards 1.2900, whilst GBP/EUR remains near the top end of its well-established range of 1.1500 – 1.1750.

UK growth data is the highlight next week whilst quarter end dynamics will affect market momentum.

GBP/EUR – 1-year chart

Week Ahead

*Bloomberg survey / Not available

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