The Significance of Verbal Communication Exceeds Quantitative Analysis at the Bank of England
The Lowdown on Thursday's Predictions:
In a world of shaky policymaking and unclear objectives, the MPC's decision for Thursdays interest rate might offer a glimmer of predictability. But it's far from reassuring.
Amidst murky data and vague comments about "geopolitical tensions" and "market volatility," forecasters are desperately trying to make sense of whether the MPC will speed up its rate-cutting cycle or maintain a more deliberate approach.
"The intriguing aspect for us will be how they communicate a more assertive policy, if they decide to do so," Oxford Economics' Andrew Goodwin told City AM. "I wouldn't say we were particular enthusiasts of this jargon they used last time, that 'careful and gradual' [phrase]. Definitely, I don't think we think it's crucial or a particularly effective way of conveying messages. But evidently, the MPC believes it is a crucial method."
"If they change those two words, if they remove one or change one to another, then that is probably a sign that they're trying to communicate something."
One potential victim of the Bank's linguistic shake-up could be its gradualism references, which could soon be on their way out, according to Oxford Economics, a view shared by Deutsche Bank's Sanjay Raja.
The Bank of England's recent struggles to control inflation, which peaked at 11% in October 2022 amidst Russia's full-scale invasion of Ukraine and Liz Truss' brief stint in Downing Street, have left rate-setters hesitant to take any action that might intensify price growth.
While the Bank of England has cut interest rates to 4.5% from a high of 5.25% in July 2022, the European Central Bank (ECB) has acted more swiftly, making seven 0.25% cuts in just over 18 months.
Will the MPC stick to 'gradual and careful'?
If the Bank's previous struggles with inflation, coupled with energy price surges and a weakening pound, caused some headaches three years ago, President Trump's tariffs may give rate-setters migraines.
Economists will be extremely attentive to the potential fallout of global trade disruptions on prices, given the inflationary effects they witnessed during the pandemic. However, a flood of Chinese imports to avoid excessively high import taxes of 125% could drive down prices.
Some economists believe the MPC may strike a more dovish tone, but they're still concerned about near-term inflation risks, according to Ruth Gregory, deputy UK economist at Capital Economics. "I think there may be some wording in the policy statement that it may want to wait for greater clarity about the impact of the trade war on inflation and it probably won't drop its existing guidance that rate cuts will be gradual and careful," Gregory said.
The Bank of England's prediction in March stated that inflation would peak around 3.75% this year, significantly higher than that pencilled in by top City forecasters and the fiscal watchdog, the Office for Budget Responsibility (OBR). "It may forecast a slightly lower peak," Gregory said, "but there's still a risk that inflation could linger longer than expected given the evidence we're seeing on things like employer National Insurance contributions and the national minimum wage." Gregory added that the manufacturing PMI output balance suggests a near-term rise in goods inflation.
Market forecasts suggest up to four rate cuts by the end of the year. Banking giant Morgan Stanley expects interest rates to drop as low as 3.25% by year's end, a level not seen since December 2022.
Predictions like these sometimes aim to nudge MPC members into accelerating interest rate cuts. An average of ten forecasters expect UK growth to dip below 1% this year, a figure the Bank projected long before Trump's 'Liberation Day.'
Bank of England Doves vs. Hawks
Despite a grim assessment of the UK's sluggish growth, hawkish views may persist. Former rate-setter Jonathan Haskel told City AM last month that he would vote to maintain interest rates due to high price growth in services.
Surprises this Thursday may emerge from members voting to keep rates steady or propose a more aggressive cut. For instance, Pantheon Macroeconomics believes Swati Dhingra and Catherine Mann will advocate a 50 basis point cut on Thursday, potentially signaling a perception that tariffs will harm demand more than they might curb supply in the UK economy.
Economists will also be closely watching the Bank's two new inflation scenarios, which replace a previous structure of three models. Policymakers will speculate about the possibilities of greater or prolonged weakness in demand in contrast to supply and the potential persistence of domestic wage and price increases.
Goodwin suggested that these new evaluations may reflect the Bank's stance on how tariffs may affect the UK economy, given the current lack of reliable trade data and volatile energy prices. "At the moment," he said, "it's more ideas than something they could actually back up with hard data."
The data at the Bank's disposal include energy prices and foreign currency exchange rates, which suggest deflationary effects on price growth. Brent crude, a global benchmark for oil prices, hit a four-year low on Monday after OPEC+ agreed to boost production. Meanwhile, the pound rose against the dollar on Monday, reflecting the continuing slide in the value of the US currency.
Markets are volatile, but the scarcity of reliable information may push Bank of England economists to consider these data points carefully. In fact, some of the strongest language in the minutes from the MPC interest rate meeting might be reserved for criticizing the Office for National Statistics' (ONS) ability to publish accurate data given its tendency to revise key estimates and lags in crucial labor market data.
Trends can flip, and retaliatory tariffs or stricter trade barriers set by the UK government could thwart the Bank's plans to eliminate inflation by the end of next year. But so far, the Treasury seems reluctant to fan the flames of trade tensions.
Some analyses may be too complex and convoluted for policymakers to consider, while imagined scenarios certainly can't foresee President Trump's next move. Generally, MPC members are operating in the dark. All they can really do is strive for clarity.
Enrichment Insights:
As of the latest updates, the Bank of England's MPC has already made its decision for May 2025, reducing the Bank Rate by 0.25 percentage points to 4.25%[1]. However, the expectations for future decisions would likely be influenced by several factors:
- Inflation: The MPC aims to maintain inflation at the 2% target. Recent disinflation progress has allowed for some policy easing, but the bank remains cautious about persistent inflationary pressures, particularly in wage growth and services prices[1][2].
- Tariffs and Trade Uncertainties: Global trade policies and tariffs are affecting economic growth worldwide. The Bank of England is likely to consider these factors, as they impact the UK economy's growth prospects[1][2].
- Geopolitical Uncertainties: The broader economic environment, including geopolitical tensions, can influence consumer and business confidence, further impacting economic growth and inflation[1][2].
- Market Expectations: Market participants are pricing in the possibility of two further rate cuts before the end of the year, reflecting concerns over weak economic growth and the potential for inflationary pressures to ease[2].
- MPC's Approach: The MPC is likely to maintain a cautious stance, balancing the need to support growth with the need to curb inflation. The committee will continue to monitor domestic inflation trends and global economic developments closely[1][2].
- The MPC's decision on interest rates could significantly impact the business sector, with lower interest rates potentially benefiting companies by reducing borrowing costs and stimulating economic growth.
- Economists and analysts are closely monitoring the Bank of England's stance on taxes, particularly those related to businesses, as changes in taxation can affect the competitiveness of the UK markets and the overall health of the economy.
- In the realm of finance and insurance, the MPC's decisions can have far-reaching implications. For instance, lower interest rates might lead to reduced returns on savings and lower premiums for insurance policies. Conversely, higher interest rates could boost returns on savings and increase insurance premiums.
