Bank of England should tailgate the ECB, not the Fed

The Bank of England's policy meeting on Thursday is unlikely to deliver any change in monetary policy — but that doesn't make it unimportant. Policymakers are likely to prepare the ground for a 25 basis-point cut from 5.25 percent at their June 20 meeting, adopting the playbook the European Central Bank established by using its April 11 meeting to effectively promise a reduction in euro rates next month.

While central bank moves aren’t coordinated, they prefer not to operate in isolation. The ECB’s anticipated move on June 6, with even the hawkish members of its Governing Council falling into line, will provide useful cover for a BOE easing a fortnight later. This week sees a quarterly UK monetary policy review that’s expected to include downward revisions to the central bank’s inflation forecasts, bolstering the argument for lower rates.

Relentless US economic strength has diminished the likelihood of Federal Reserve action. The futures market now anticipates only two quarter-point rate cuts this year, down from six at the start of January, and no change expected next month. What happens in the US doesn’t just stay there; traders have scaled back expectations for how aggressive central banks elsewhere will be in relaxing monetary conditions. UK interest rates are now expected to be cut by just 50 basis points by December, down from the 150 basis points expected at the start of the year. A BOE move next month is a coin toss, while an ECB reduction is all but a certainty. Wednesday's less hawkish Fed meeting, with Chair Jerome Powell maintaining a bias to ease and calling a hike unlikely, makes it easier for both the ECB and BOE to go first.

The BOE is pushing back against this more hawkish market pricing, according to Bloomberg Economics. There's been a subtle shift in BOE rhetoric pointing out that the UK shares more similarities with the euro economy than the US. Deputy Governor Dave Ramsden has made a noticeable switch to the dovish side, as he sees domestic pressures “receding”. He may vote for a rate cut this week, if his April 19 remarks describing “the UK as less of an outlier and more of a laggard” are taken at face value. That would put him alongside dove Swati Dhingra, who’s voted repeatedly for lower rates, producing a 7-2 split for unchanged rates on Thursday but giving an indication that momentum is shifting toward easing.