Bank of England (BOE) policymaker Catherine Mann recently highlighted a discrepancy between market expectations and the likely course of interest rate adjustments. Mann emphasized that the anticipation of numerous rate cuts within this year might be overly optimistic. Notably, she pointed out that the UK is unlikely to initiate rate cuts ahead of the US Federal Reserve.
In a shift from her previous stance, Mann voted to maintain the interest rate at 5.25%, a decision influenced by signs of a weakening labor market and reduced consumer spending on non-essential services. Despite this, she maintains that the market's expectation for a quick succession of rate reductions is overly optimistic. The current market forecast includes three quarter-point cuts starting in August, with some predictions suggesting the BOE might lead a global trend towards lower borrowing costs.
Mann, known for her hawkish views, had consistently voted for rate hikes since December 2021 until the recent change. This move signals a potential shift in the BOE's approach, as it nears a victory over inflation, which has dropped from over 11% to 3.4%. BOE Governor Andrew Bailey hinted that rate cuts could commence before inflation reaches the 2% target.
However, Mann advises caution, noting that the UK's inflation pressures, particularly in wages and service costs, remain more pronounced than in the US or the euro area. She attributes her change in voting to the softening of discretionary spending, a loosening labor market, and a shift in market expectations towards fewer rate cuts.
Despite these developments, traders remain poised for three quarter-point rate reductions from the BOE this year, with a significant chance of a cut as early as June. Mann also commented on the BOE's forecasting methods, suggesting they provide more clarity than the Federal Reserve's "dot plot" by openly discussing voting outcomes and rationales.
