Bank of England lays the groundwork for 'hawkish rate cuts'

 

The Bank of England appears ready to cut interest rates

"Hawkish interest rate cuts" are becoming popular among central banks around the world. This is not a made-to-order policy, but a ready-made adjustment to interest rates, conveying to the market that tight financial conditions will continue in the future.

　The Bank of England has not yet cut interest rates, but it appears ready to do so. The Bank of England on Tuesday kept its benchmark interest rate unchanged at 5.25%, even though UK inflation recently fell to its target level of 2%, for the first time in nearly three years.

　Investors had almost universally expected the decision to maintain the status quo, in part because services inflation remained very high in May. The Bank of England also noted that overall inflation should rise again year-on-year as the effects of last year's fall in energy prices fade.

"Monetary policy needs to remain accommodative for a long time," the bank said.

　On the other hand, he also hinted at the possibility of lowering interest rates as early as August. This is likely the reason why the pound weakened and the dollar strengthened after the minutes of the bank's Monetary Policy Committee (MPC) were published.

　For example, the minutes said leaving interest rates unchanged was a "tight call" for some members, who believed that services inflation was mostly in price-controlled or volatile items and not a reflection of an overheating economy. Similarly, members noted that tight monetary policy was hurting the economy and labor market.

 The surprise announcement of the UK general election (voting date: July 4) probably also influenced the policy decision. Although the committee members denied that the election would have any impact, financial industry analysts did not expect a rate cut just before the election. Nevertheless, if inflation and employment statistics released in July are weak, the subsequent developments will be clear.

　How to reconcile these two impulses? Britain is likely to follow the path set by the European Central Bank this month: cut rates modestly and make no commitment to further cuts. The Federal Reserve may also be making a similar move later this year.

　Central bankers now have a strong incentive to respond to slowing inflation while avoiding criticism if inflation starts to rise.

　Central banking often has to do with following the right trends.