UK traders who favour Bank of England interest rate cuts in the summer are “making bets in the wrong direction” as any easing is “some way off,” says Monetary Policy Committee member Megan Greene.
The comments from the hawkish external MPC member come as US inflation lifted to 3.5% yesterday, up from 3.2% a month ago, topping the 3.4% consensus.
US traders now forecast the Federal Reserve will cut interest rates twice instead of three times this year.
While in the UK, markets are now betting on at least two quarter-point cuts this year.
UK Bank rate is now seen falling to around 4.75% by the end of 2023, down from 5.25% today, having previously been expected to drop to 4.5% by December.
But writing in the Financial Times today, Greene says that assumption is far too generous.
She says: “Following surprisingly strong US March CPI inflation, markets now expect the Bank of England will cut rates earlier and by more than the Federal Reserve this year. Macroeconomic fundamentals and inflation dynamics differ in the UK and the US, and there’s a greater risk of persistence in the former.
“The markets are moving rate cut bets in the wrong direction.”
Greene adds that the US enjoys a stronger economy than the UK, which allows it a greater chance of fighting inflationary pressure.
She points out: “The MPC recently estimated potential growth of 1% this year, rising moderately to 1.3” by 2026. America’s Congressional Budget Office estimates US potential growth of 2.2% over the same period.
“This means the US can withstand more demand in the economy before it turns inflationary. While the UK has long lagged behind the US in potential growth, the difference became much starker during the pandemic.”
Greene adds: “The UK economy has faced the double whammy of a very tight labour market and a terms of trade shock from energy prices. Inflation persistence is therefore a greater threat for it than the US. But market pricing for interest rates does not reflect this.
“In my view, rate cuts in the UK should still be a way off.”
Greene’s comments come after BoE governor Andrew Bailey last month said that interest rate cuts were “on the way” amid signs of easing inflationary pressures.
Tomorrow, former US Federal Reserve chair Ben Bernanke will publish his long-awaited review on how the Bank of England publishes its rate-setting guidance, after the central bank’s current forecasts have come under heavy criticism.
