Following the Bank of England's most recent meeting, financial markets are now looking towards August 1 as the next likely date for a rate cut.
The policy rate was left unchanged at 5.25% on June 20, with seven members of the Monetary Policy Committee voting to keep it unchanged and two voting to cut it by 0.25 percentage points, the same voting pattern as at the May meeting.
Despite this superficial similarity, a lot has changed since the May 9 announcement. Inflation is now at its 2% target for the first time since July 2021. The tone of the message from the bank has also changed, with its June decision to keep rates unchanged being a “delicate balance”.
If inflation is back on target, why didn't the bank cut interest rates on June 20? With “data addiction” becoming the new central bank mantra, it seems logical for the bank to follow the CPI figures.
“The MPC is following the data, which is clearly heading in the right direction, so a rate cut would be inevitable,” said Michael Field, European market strategist at Morningstar.
Some bank members want more data
Some policymakers are still not convinced that the decline in inflation from more than 11% in 2022 to 2% in May 2024 is sustainable and want to see more data before making a firm decision.
The members who voted to keep rates unchanged said they wanted “further evidence of a decline in the persistence of inflation before easing the tightness of monetary policy,” according to a June 20 statement. Globally, inflation has shown signs of resurging, with the U.S. Federal Reserve slowing its rate cut trajectory and the European Central Bank raising its inflation forecast for the rest of the year.
Remaining vigilant, some forecasts see inflation rising again towards the end of the year, not because of an expected sharp rise in the cost of living, but because of an unfavourable comparison with energy bills in 2023. The bank forecasts the CPI to be 2.5% by the end of 2024.
The Bank of England continues to closely monitor services inflation, which was at 5.7% in May, and core inflation, which was at 3.5%. Core CPI is of concern as it has fallen more slowly than headline inflation, and is considered a more realistic indicator of price pressures in the UK economy than a lower headline CPI rate.
July a busy month for UK, macro data
The Bank does not meet in July, so by the time it next meets a new government may be in place with new fiscal priorities set, new inflation figures are due to be released on 17 July and wages data on 18 July, and the August interest rate decision will be accompanied by the (roughly) quarterly monetary policy report and press conference where new forecasts will be issued.
The Fed's policy committee will have a new voting member, Claire Lombardelli, replacing longtime member Ben Broadbent, who voted to keep interest rates unchanged in June. The Fed is also scheduled to make its next interest rate decision at its meeting scheduled for July 30-31.
“A single rate cut would still result in tighter monetary policy,” Governor Andrew Bailey said at a May press conference. After all, interest rates have risen from 0.1% to 5.25% since December 2021 and have remained at that level since August 2023. So the bank is in no rush to remove those hikes.
“Central banks will want to avoid the policy mistake of cutting rates and then having forces outside their control cause them to hold back on the cut, or even worse, withdraw stimulus altogether,” Julian Howard, chief multi-asset investment strategist at GAM, said in a note.
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