GBP rebounds as Bank of England maintains ratesAnd maintains 'higher for longer' mantraSuggesting GBP can extend 2024 outperformanceNevertheless, subtle changes suggest a pivot is underwaySummer rate cut is likely

Above: Filey image of Bank of England Governor Andrew Bailey. Image: Bank of England. Licensing: 2.0.

The British Pound was under pressure heading into the Bank of England's February update but recovered after policymakers let it be known it was no closer to cutting interest rates.

One member of the Monetary Policy Committee (MPC) - Swati Dhingra - voted for a cut, but being a perma-dove, the move doesn't carry much weight. More importantly, six members voted to keep interest rates unchanged, and two voted for further rate hikes.

This vote composition leans on the 'hawkish' side, as does the Bank's statement, which retained the crucial line that "monetary policy will need to remain restrictive for sufficiently long to return inflation to the 2% target sustainably in the medium term."

The retention of this phrase and the vote composition suggests the Bank is maintaining the 'higher for longer' mantra through the first quarter.

Fading odds of an early rate cut have ensured the British Pound is a joint top performer in the G10 for 2024; today's developments can keep this trend going.

The Pound to Euro exchange rate was sold steadily through the morning session but recovered sharply to above 1.17 following the announcement. The Pound to Dollar exchange rate was under pressure owing to the previous day's Federal Reserve policy decision - which also pushed back on rate cut bets - but it recovered steadily through the session to end the day at 1.2743, its highest close since January 12.

The new forecasts from the Bank are also important and convey a clear sense of why an expected fall in inflation to 2.0% in April won't invite an immediate rate cut.

The Bank says in a statement that CPI inflation is projected to fall temporarily to the 2% target in 2024 Q2 before increasing again in Q3 and Q4. Indeed, in the press conference, Governor Andrew Bailey said inflation returning to the 2.0% target in April is not a case of "job done" as services price pressures remain persistent.

"While inflation is following a downward trend towards the 2% target, it’s not clear whether rates will follow suit. Relatively high wage inflation alongside an uptick in services inflation in December means that a rate cut before the summer is increasingly unlikely to materialise," says Anna Leach, Deputy Chief Economist at the CBI.

Above: GBPUSD (top) and GBPEUR at 30-minute intervals showing steady selling into the BoE and the subsequent rebound. Track GBP with your own custom rate alerts. Set Up Here

There were nevertheless signs a slow pivot in policy was underway, with the Bank confirming that the period interest rates would need to stay at current highs was "under review". Additionally, a previous commitment to the possible need for "further tightening" was dropped.

In a potential nod to the prospect of rate cuts down the line, the Bank acknowledges that the risks to inflation are more balanced.

"On the whole, the BoE decision was slightly hawkish relative to expectations heading into the release. Thus, markets have pared near-term rate cuts bets and by extension lifted sterling higher. That said, the pivot towards looser policy going forward is in," says Justin McQueen a market analyst at Reuters.

On balance, these developments point to the likelihood of the first rate cut of the cycle landing in August as opposed to May, which was the market consensus expectation heading into today. "Although services price inflation and wage growth have fallen by somewhat more than expected, key indicators of inflation persistence remain elevated," says the statement.

Crucially, the Bank's new inflation forecasts show inflation will remain above the 2.0% target over nearly all of the remainder of the forecast period.

This reflects the persistence of domestic inflationary pressures, despite an increasing degree of slack in the economy. CPI inflation is projected to be 2.3% in two years’ time, says the Bank.

Above: Inflation is expected to fall to 2.0% but then rise again.

The Bank raised its GDP forecasts and now sees 0.25% growth in 2024, followed by 0.75% and 1% growth in the two following years.

Bank of England Governor Andrew Bailey said the MPC needs to "see more evidence that inflation is set to fall all the way to 2%" before they can consider cutting interest rates.

"This rhetoric supports our view that the market is currently overzealous in their pricing of rate cuts," says Shane O'Neill, Head of Interest Rates at Validus Risk Management.

Ahead of the meeting markets were pricing 115bps of cuts for this year and this has been marginally adjusted lower to 110bps following the release, and "we believe this has further to go," says O'Neill.

The repricing lower in rate cut expectations through 2024 has been a key driver of the Pound's rebound. Any extension of this trend is thus supportive of further Sterling outperformance.