An early preview of the Bank of England meeting – Commerzbank

Reports emerged yesterday morning that the Bank of England (BoE) may lower its inflation and growth forecasts at Thursday's meeting and remove the reference to 'gradual' interest rate cuts from its statement. The former should come as little surprise given that growth indicators have been mixed at best of late and policymakers have repeatedly stressed that US tariffs could well have a disinflationary effect in the UK. The main focus will probably be on the extent of the downgrades to forecasts. The BoE has been quite aggressive in revising its forecasts in both directions in recent months, so there is a chance that we will see a repeat on Thursday, Commerzbank's FX analyst Michael Pfister notes.

Mixed data keeps a floor under dovishness

"An aggressive revision towards lower inflation and growth would also pave the way for a much more exciting change. If the BoE does indeed remove the reference to gradual rate cuts from its statement, this would increase the scope for faster (and larger) rate cuts than previously expected - taking away one of the pound's few remaining supporting arguments. But are policymakers really ready to make such a U-turn on Thursday? Central banks around the world have been very cautious about committing themselves prematurely in the wake of the US tariffs, preferring to emphasise the great uncertainty the world has been in since the announcement. "

"While not impossible, it is unlikely that the BoE would want to be the exception here. On the other hand, there are still data that argue against faster rate cuts. Wages continue to rise strongly and services inflation is still very high. This is unlikely to change much even if Chinese goods become more widely available in Europe. And it was clear a few months ago that UK growth would not be spectacular in the months ahead. Recently, however, the figures have been quite strong again as the UK has benefited from the frontloading of US companies and consumers."

"Now, this does not necessarily mean a complete turnaround, leading to speculation of an imminent 50bp rate cut. The BoE may lower its growth and inflation forecasts, while at the same time, as in February, there might be seven votes in favour of a 25bp cut, with two dissenting votes for a larger move. Although it is difficult to predict, given the rather fickle nature of the BoE, such a scenario seems to me the most likely at the moment. However, the risks are tilted towards a more dovish BoE, which would certainly be problematic for the pound."