As widely anticipated, the Federal Reserve (Fed) maintained its primary policy rate target at a 23-year peak ranging between 5.25% and 5.5%. However, the spotlight was on the Fed's updated economic forecasts, particularly the Dot Plot, which indicated that officials still anticipate implementing three rounds of 0.25 percentage point rate cuts this year. This suggests a belief that inflation is moderating sufficiently to warrant a reduction in borrowing costs. Correspondingly, the US dollar index dipped to one-week lows in sync with US yields, while US stock markets concluded at historic highs, and pro-cyclical currencies surged.
Revised rate projections by policymakers revealed a median interest rate expectation of 4.625% by year-end, consistent with December's figures. Forecasts for the following two years and the long-term outlook were slightly elevated compared to the previous quarter, with only three reductions anticipated in 2025, down from the four predicted in December. Although the overall dispersion of the Dot Plot leans more hawkish, with the median projection retaining three cuts for this year, officials emphasized that any future rate adjustments would hinge on data, economic outlook, and risk assessment. Fed Chair Jerome Powell adopted a dovish tone, suggesting that persistent early-year inflation might be attributed to "seasonal issues." These remarks, along with the recalibration of Fed rate cut expectations, elicited positive reactions from investors, reflected in the S&P 500 surging past 5,230 and the Dow Jones achieving new all-time highs.
Today's focus shifts to the monetary policy decision of the Bank of England (BoE). While the Bank Rate is anticipated to remain at 5.25%, the larger-than-expected decline in the UK inflation rate might prompt BoE officials to adopt a more dovish stance. Such a move could potentially weaken the pound, currently trading 0.7% below its seven-month high against the USD reached two weeks ago.
During the BoE's previous meeting in February, a rare three-way vote split occurred, including proposals for both rate hikes and cuts, marking the sixth instance of such divergence in the BoE's 295-meeting history and the first since August 2008. Historically, following such voting patterns, the central bank has often opted for rate cuts in subsequent moves, although this outcome seems highly improbable today. Despite headline UK inflation sliding more than anticipated to 3.4% in February, down from 4.0% the previous month, with core inflation at 4.5% and service inflation remaining above 6%, we do not anticipate overtly dovish signals from the BoE in today's announcement. Money markets still indicate expectations of fewer than three 25-basis-point rate cuts by the BoE this year. However, given the recent downward surprises in inflation and softer indicators in the labour market, market pricing suggests approximately a 55% likelihood of an earlier rate cut occurring in June rather than in August.