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HEW: BoE Lunges Hopefully After ECB

• A deluge of central bank decisions landed as expected, with cuts or cautious progress towards them over the past week. But the BoE’s bombshell guidance blew up our call and market pricing. We now expect an August cut but are worried it will be a mistake.
• The macro data should be more of a market driver again next week, with US inflation on Wednesday, UK labour market data on Tuesday and rolling updates on HICP, GDP and employment around the EA. Only the Philippines has a notable rate decision for us.

By Philip Rush

Peru Policy Interest Rate 5.75% (consensus 5.75%) in May-24

• The BCRP cut the policy rate to 5.75%, a move anticipated by consensus forecasts, reflecting a strategy to balance economic support with inflation control, following a period of rate decisions that defied expectations.
• Future policy decisions will be heavily influenced by ongoing assessments of inflation trends, economic indicators, and external economic risks, focusing on maintaining inflation within the established target range.
• The BCRP remains vigilantly prepared to adjust its monetary policy in response to new economic data, emphasizing a commitment to stability amid global economic uncertainties and potential market volatilities.

Mexico Policy Rate 11.0% (consensus 11.0%) in May-24

• Banco de México held the overnight interbank interest rate at 11.00%, in line with economic consensus, reflecting continued caution amid mixed inflation signals and subdued economic growth.
• Despite a decrease in core inflation, headline inflation rose slightly, leading to an upward revision of future inflation forecasts and extending the expected timeline for achieving the 3% inflation target to the end of 2025.
• The central bank recognizes the prevailing economic and geopolitical risks, maintaining a restrictive policy stance while preparing for potential adjustments based on forthcoming economic data and inflation trends.

BoE Errs Towards Cutting Too Early

• The BoE’s unsurprising decision to maintain the Bank rate at 5.25% was accompanied by rare pushback against prevailing market pricing. MPC members are more dovish.
• June’s outcome will depend on developments in their inflation persistence assessment, including wage settlements where the current data are tracking excessively high.
• That upside seems unlikely to discourage the MPC for long, so we now expect the MPC to start cutting in August but with a pause in February and a risk of a reversal.

By Philip Rush