Morgan Stanley has maintained its stance that the Bank of England could potentially cut interest rates in May, a stance that diverges from prevailing market sentiment increasingly skeptical of such a move.
Chief economist Jens Eisenschmidt reaffirmed the bank’s earlier prediction during an interview with CNBC’s “Street Signs” on Wednesday. This view contrasts with the consensus, which currently anticipates an initial rate cut by the BOE in September, as per LSEG data.
The backdrop for this speculation includes the U.K.’s preparation for a general election expected sometime before January 28, 2025.
Expectations for a rate cut have weakened in recent weeks due to persistent U.S. inflation and a more hawkish tone from the Federal Reserve, raising doubts about global disinflation trends.
Even the European Central Bank, which hinted at a forthcoming rate reduction last week, acknowledged that escalating tensions in the Middle East could jeopardize those plans.
In contrast, Bank of England Governor Andrew Bailey noted on Wednesday that the inflation outlook in Europe differs from that in the U.S., expressing confidence that U.K. inflation is receding and aligning closely with the institution’s forecasts.
Although U.K. inflation moderated slightly less than anticipated, dropping to 3.2% in March from 3.4% in February, it fell short of analysts’ expectations of 3.1% for last month.
The BOE anticipates inflation to dip below its 2% target in the second quarter before climbing back toward 3% later in the year, a view shared by Morgan Stanley’s U.K. economist, according to Eisenschmidt.
Eisenschmidt emphasized that central banks globally are going through a complex path toward disinflation, advocating for a cautious and measured approach.
While rate cuts appear inevitable for the U.K. and the ECB, he suggested that the Fed might adopt a more patient stance.
Morgan Stanley recently adjusted its forecasts for ECB rate cuts, now projecting three cuts this year, with the first expected in June. Alongside revisions to its Fed outlook, Morgan Stanley anticipates three cuts, with the first expected in July.
