Whatever happens, it looks like the Bank of England may well cut rates ahead of the Fed, where we expect the first move in September. We think the totality of BoE cuts this year will be greater too.
That would mark a bit of a departure from the recent rate hike cycle, where the BoE, along with several other European central banks, appeared to chase US rates higher out of heightened sensitivity to currency weakness.
The link between Fed and BoE policy is often overstated
However, that period was unusual, and we think the link between Fed and BoE policy is often overstated. There are plenty of examples where the BoE has diverged from the Fed in a meaningful way, and the US rate hiking cycle in 2016-18 is the most recent.
Indeed, those concerns about the impact of a weaker currency have probably taken a back seat. Not only is inflation much lower and there’s greater confidence about the disfination in the pipeline, sterling has been one of the more resilient G10 currencies in the face of renewed dollar strength. In a sense, that offers a bit of a cushion against any fresh weakness and feedthrough to inflation.
In short, we don’t think the BoE would have many qualms about cutting rates before the Federal Reserve, nor moving a little more quickly in subsequent meetings.
