Aug 1 2024: The Bank of England (BoE) appears ready to reduce interest rates on Thursday after maintaining them at a 16-year high of 5.25% for the past year. However, markets and economists remain uncertain about the British central bank’s decision.
A Reuters poll last week showed that most economists expected a quarter-point cut but anticipated a close vote within the BoE’s Monetary Policy Committee (MPC), likely a narrow 5-4 majority in favor.
Late on Wednesday, financial markets were pricing in a 66% chance of a quarter-point cut, with expectations for one more cut before the year’s end.
“It’s certainly going to be a finely balanced decision. You can see that from the market pricing,” said Jack Meaning, chief UK economist at Barclays.
In June, the MPC voted 7-2 to hold rates steady, but meeting minutes revealed that several members were close to voting for a cut.
Predicting shifts in policymakers’ views since then is challenging. Only one potential swing voter, chief economist Huw Pill, spoke during the two-and-a-half-week window between the end of Britain’s election campaign on July 4 and the start of the BoE’s pre-decision quiet period last week.
Additionally, there has been a change in personnel, with Clare Lombardelli, former OECD and finance ministry chief economist, succeeding Ben Broadbent as deputy governor, giving the MPC a female majority for the first time.
British consumer price inflation returned to the BoE’s 2% target in May and stayed there in June, down from a 41-year high of 11.1% in October 2022.
This puts British inflation lower than in the eurozone, where the European Central Bank cut rates in June, and the United States, where the Federal Reserve kept interest rates steady but hinted at a September cut on Wednesday.
However, the BoE anticipates a slight increase in headline inflation in the coming months and is more focused on medium-term drivers: services prices, wages, and overall labor market tightness.
Services price inflation, at 5.7% in June, has not fallen as much as the BoE forecast three months ago.
Policymakers must determine if this indicates greater medium-term pressures or is due to one-off effects such as a surge in hotel prices during concert tours by artists like Taylor Swift.
Is There Time to Delay?
Jack Meaning, a former BoE economist, believes delaying a rate cut until September would be a mistake.
“There is always a reason to wait a little bit longer… (but) if you wait until it’s absolutely conclusive, then you’ve probably waited too long,” he said.
By September, official data may show headline inflation back above 2%, which would make a rate cut seem ill-timed. Additionally, there is no scheduled press conference for Governor Andrew Bailey to explain the decision in September.
Updated BoE forecasts on Thursday are likely to show inflation falling below its 2% target in the medium term, suggesting a rate cut is necessary sooner rather than later due to the time it takes for lower rates to impact prices.
The September meeting will also include an annual vote on the pace of reversing past quantitative easing, a decision kept distinct from regular interest rate votes.
However, the MPC may opt for caution. In June, Bailey said policymakers “need to be sure that inflation will stay low” before cutting rates. Last month, Pill noted that wages and services prices continued to show “uncomfortable strength.”
Growth this year has also been stronger than the BoE or most economists expected.
“While it will be a very close call, the economy’s recent strength and the stickiness of services inflation lead us to think that the Bank of England will wait,” said Ruth Gregory, deputy chief UK economist at Capital Economics.