Synopsis:

In their analysis of the recent Bank of England (BoE) May meeting, ING suggests that the central bank is progressively nearing its first rate cut, potentially as soon as this summer. Despite the unchanged rates in the latest policy announcement, the overall tone of the communication has grown increasingly dovish.

Key Points:

• Policy Rate Decision: The BoE maintained the Bank Rate at 5.25%, aligning with expectations but adjusting the narrative to reflect a more positive inflation outlook compared to the U.S.
• Forward Guidance: The BoE's forward guidance on keeping rates restrictive remains unchanged, indicating hesitance to commit to a June rate cut despite a more dovish tone elsewhere.
• Governor Bailey’s Remarks: During a news conference, Governor Andrew Bailey mentioned that a June rate cut is not assured, emphasizing the Bank’s cautious stance ahead of upcoming inflation reports.
• Inflation Forecasts: The Bank's updated forecasts show a two-year inflation projection at the target rate of 2%, based on current market rate expectations, signaling some level of comfort with the market’s anticipation of two rate cuts this year.

Conclusion:

While the BoE is signaling a readiness to begin reducing rates, the exact timing remains uncertain, with ING leaning towards an August commencement. The decision hinges significantly on forthcoming inflation data, particularly in the service sector, which could sway the BoE's hand sooner if results are unexpectedly high. The BoE is positioning itself to potentially move ahead of the Fed in adjusting rates, reflecting a strategic divergence in monetary policy paths between the two central banks.