Contrary to the prevailing market sentiment, Morgan Stanley believes the Bank of England (BOE) may still reduce interest rates in May.
A Bold Forecast Amidst a Consensus Shift
Morgan Stanley’s prediction stands in contrast to the broader consensus, which now anticipates the BOE’s first rate cut in September, as per LSEG data. This forecast comes ahead of the upcoming U.K. general election, slated for a date before Jan. 28, 2025.
Sticky Inflation and Hawkish Fed:
In recent weeks, hopes for rate cuts have waned due to persistent inflation in the United States and increasingly assertive comments from the Federal Reserve, raising concerns about the global inflation trajectory.
Even the European Central Bank (ECB), which hinted at an upcoming rate cut last week, has acknowledged that tensions in the Middle East could jeopardize those plans.
BOE Governor’s Outlook:
Bank of England Governor Andrew Bailey expressed optimism about falling U.K. inflation, describing the recent data as aligned with the institution’s forecasts.
U.K. inflation did decline slightly in March, dropping from 3.4% to 3.2%, but remained above analysts’ estimates of 3.1%.
Morgan Stanley’s Confidence:
Morgan Stanley’s chief economist, Jens Eisenschmidt, maintains that inflation will fall below the BOE’s target of 2% in the second quarter, before modestly recovering later this year.
“Central banks are in a similar situation. Disinflation is ongoing but not fully secure, so a slow and measured approach is prudent,” Eisenschmidt explained.
“Nonetheless, both the U.K. and the ECB are expected to reduce rates, while the Fed may take a little longer,” he added.
Morgan Stanley recently revised its expectations for ECB and Fed rate cuts. It now forecasts three cuts from both institutions this year, with the ECB’s first reduction coming in June and the Fed’s in July.
Data sourced from: cnbc.com
