On-target Inflation Would Greenlight to Summer Rate Cut: Broadbent

Above: A file image of Ben Broadbent. Image © Bank of England

Wednesday's inflation release merely has to print in line with the Bank of England's forecast to trigger an interest rate cut in the summer.

This is according to outgoing Monetary Policy Committee member Ben Broadbent, who delivered his farewell speech ahead of his departure from Threadneedle Street.

The Bank expects inflation to hit 2.1% year-on-year in April, down from 3.2% in March, as a significant reduction in household energy bills creates a significant drag on the headline rate.

"The MPC will continue to learn from the incoming data and, if things continue to evolve with its forecasts – forecasts that suggest policy will have to become less restrictive at some point – then it’s possible Bank Rate could be cut some time over the summer," says Broadbent.

Broadbent said in his speech that the Bank's forecasting ability has improved notably recently as the impacts of numerous unforeseen shocks fade from the economy, making the art of prediction easier.

The timing of the summer cut is up for debate, with markets attaching about a 50% probability of the first move coming in June.

A cut is fully priced by August.

"I like to be contrarian and say that June is on for a cut but I think they will be cautious and wait until August," says Neil Wilson, Chief Market Analyst at Finalto.

James Smith, Developed Markets Economist at ING Bank says although the Bank of England is preparing for its first rate cut, Wednesday’s services inflation data will determine whether that comes in June or August.

Services inflation is the aspect of the inflation basket that has proven resilient and might ultimately undermine a sustained fall in the headline rate to fall to 2.0%. It is why the Bank won't see a 2.1% reading in headline CPI as an automatic trigger to lower interest rates.

"We think services inflation could come in hotter than expected, and if we're right, that would favour another 'on hold' decision next month," says Smith.