After the most recent Bank of England meeting, financial markets are now focusing on August 1 as the next likely date for a cut.
Rates were held on June 20 at 5.25%, with seven monetary policy committee members voting for no change and two voting for a 0.25 percentage point cut. This was the same voting pattern as in the May meeting.
Despite this superficial similarity much has changed since the May 9 announcement: inflation is now at the 2% target, the first time since July 2021. And the tone of the messaging from the Bank has also changed; June’s decision to hold was “finely balanced”.
If inflation is now back at target, why didn’t the Bank just cut rates on June 20? With “data dependency” the new mantra among central banks, it would seem logical for the Bank to follow the CPI numbers.
“The MPC is following the data. The data is clearly moving in the right direction, and therefore, rate cuts will have to follow,” says Michael Field, European market strategist at Morningstar.
Some Bank Members Want More Data
Some policymakers not yet convinced that the drop in inflation from more than 11% in 2022 to 2% in May 2024 is sustainable and want to see more data to make a firm decision.
These members who voted for a hold wanted “more evidence of diminishing inflation persistence … before reducing the degree of monetary policy restrictiveness”, the June 20 statement said. Globally, inflation is showing signs of returning, with the Federal Reserve delaying its rate-cutting pathway and the European Central Bank increasing its inflation forecasts for the rest of the year.
On the side of ongoing caution are forecasts for inflation rising again towards the end of the year, although this is due to unfavourable comparisons with energy bills in 2023 rather than an expected spike in the cost of living. The Bank forecasts CPI to be at 2.5% by the end of 2024.
The Bank of England is still closely monitoring services inflation, which stood at 5.7% in May, and core inflation, which was 3.5%. Core CPI is a concern because it's falling more slowly than the headline rate of inflation. It's also considered a more realistic measure of price pressures in the UK economy than the lower headline CPI rate.
July a Busy Month for the UK, Macro Data
There is no Bank meeting in July, so by the time it next meets there may be a new government in place, with a new set of fiscal priorities. There will also be another set of inflation numbers, due July 17, and wage data, which are released on July 18. And the August interest rate decision will be accompanied by the (roughly) quarterly monetary policy report and press conference, where new forecasts will be unveiled.
The Bank’s MPC will also have a new voting member, Clare Lombardelli, replacing long-standing member Ben Broadbent, who voted to keep rates unchanged in June. The Federal Reserve will also have made its next interest rate decision in a meeting scheduled July 30-31.
In May’s press conference, governor Andrew Bailey said that “one cut would still leave us with restrictive monetary policy”. After all, rates have gone from 0.1% to 5.25% since December 2021, and have held at the same level since August 2023. So the Bank is in no hurry to unwind these increases.
“The Bank will be keen to avoid a policy error in which it cuts rates but then has to hold fire or, worse, outright reverse the easing due to forces beyond its control,” Julian Howard, chief multi-asset Investment Strategist at GAM said in a note.
