The Wall Street bank’s contrarian view is now some way off consensus, which currently prices in an initial BOE rate cut in September, according to LSEG data. It comes as the U.K. gears up for a general election due some time before Jan. 28, 2025.
Rate cut expectations have thinned over recent weeks, as sticky U.S. inflation and increasingly hawkish Federal Reserve comments have cast doubt on the global disinflation picture.
Even the European Central Bank, which last week signaled an upcoming rate trim, has said that rising Middle East tensions could threaten those plans.
Bank of England Governor Andrew Bailey on Wednesday said that the outlook in Europe differed from that in the U.S. and voiced optimism that U.K. inflation was falling, describing the latest data as “pretty much on track” with the institution’s forecasts.
U.K. inflation eased slightly less than expected, declining to 3.2% in March from 3.4% in February, but falling short of the 3.1% that analysts had projected for last month.
The BOE has forecast inflation will fall below its 2% target in the second quarter, before rising back toward 3% later this year. Morgan Stanley’s U.K. economist shares that view, Eisenschmidt said.
“In general, the central banks are all, to some extent, in the same boat. The disinflationary process is bumpy, it’s not fully secured, and so you want to go slow, you want to go at a measured pace,” Eisenschmidt said.
“At the same time, I think for both the U.K. and the ECB it’s clear that the rate cuts are coming. While for the Fed, as I said, there’s a little bit more of a wait still,” he added.
Morgan Stanley on Monday revised its ECB rate cut forecast, following an earlier revision in its Fed outlook. It now expects both central banks to cut rates three times this year, anticipating the ECB will make its first reduction in June, and the Fed will implement its first trim in July.
