The Bank of England is experiencing more split than ever as a dovish pivot does not mean rate cuts.

A shift to a dovish pivot by the Bank of England doesn’t necessarily translate into imminent rate cuts, especially as both the BOE and the Federal Reserve express concerns about the volatility of inflation throughout the year. In comparison to the European Central Bank, the BOE and Fed appear less dovish, evident in their upward revisions of longer-term Consumer Price Index forecasts.

On Thursday, the Bank of England maintained the interest rates at 5.25%, implementing its own ‘dovish pivot’ by eliminating references to further tightening in their statement. However, it’s important to note that a dovish pivot doesn’t necessarily imply impending rate cuts. Governor Andrew Bailey highlights that even if inflation retreats to 2% this year, challenges persist. The concern lies in the potential pivot of inflation, with the BOE worried about the possibility of it rising again despite an anticipated decline to 2% in the coming months.

The Bank of England navigates the tightrope of forward guidance.

The Bank of England is resolutely maintaining its current stance, and the guidance provided is not unequivocal. In the meeting minutes, they indicated a review of the duration for which the ‘Bank Rate should be maintained at the current level’ and emphasized the need for policy to remain ‘restrictive for sufficiently long’ to curb inflation pressures. This stance does not align with immediate rate hikes; rather, it implies a status quo. However, the ‘higher for longer’ approach is now under scrutiny. If inflationary pressures ease, there’s an indication that rate cuts may be considered.

The influence on the market is due to a less dovish stance from the Federal Reserve.

The Bank of England’s stance is less dovish than anticipated, prompting a rise in Gilt yields across the curve. The 2-year yield has increased by 4 basis points, while the 10-year yield is up by 3 basis points. GBP/USD is recovering from earlier losses, testing $1.27, and the FTSE 350, comprising domestically focused firms, is retracting from daily highs. Expectations for the BOE’s first interest rate cut have shifted from May to June, with a slight chance of a cut in May. The market now projects rates ending 2024 at 4.07%, factoring in just over 4 rate cuts for the following year.

Both the Bank of England (BoE) and the Federal Reserve appear to have a less dovish stance compared to the European Central Bank (ECB).

Andrew Bailey echoes a sentiment similar to the Federal Reserve, emphasizing the need for additional evidence of a sustained decline in inflation before considering rate cuts. This positions both the Bank of England (BOE) and the Fed as less dovish compared to the European Central Bank (ECB). Unlike the BOE and the Fed, the ECB, under Christine Lagarde, has indicated a potential rate cut in the summer. The BOE, aligned with the Fed, adopts a data-watch approach, with Bailey highlighting that any rate cut depends on the evolving outlook. This introduces increased volatility around crucial UK data releases such as CPI, wage data, and PPI.