The Bank of England will likely cut Bank Rate by 25bps to 4.00% at its meeting on Thursday (7 August), but it’s unlikely to be unanimous, with two hawkish Monetary Policy Committee (MPC) members expected to favour no change.
In a research note published this week, analysts at EY noted that the MPC will probably indicate it remains confident that disinflation remains on track, but that it’s less concerned about the jobs market than it was at its previous meeting.
As interest rates start to approach neutral, the big question at this meeting is whether the Bank of England offers any updated guidance on how far it intends to lower the Bank Rate, the group said.
“At its June meeting, the MPC was clear about its intention to reduce interest rates further, and most of the Committee will likely have seen enough since to deliver another cut at its August meeting,” said Matt Swannell, Chief Economic Advisor to the EY ITEM Club.
“While upward revisions to official estimates of payrolled employees will have eased some concerns around job market prospects, the labour market has still weakened and pay growth has cooled more quickly than the Bank of England’s May forecast.”
However, signs of lingering price pressures will mean the Committee remains cautious, with two of the hawkish MPC members expected to favour no change, Swannell said.
“Inflation has risen by more than the Bank of England expected three months ago. The increase in food prices is particularly important to the MPC as it feeds through to households’ inflation expectations, one of the Committee’s key gauges around the risk of inflation persistence.”
A test of patience
The MPC has appeared more worried about cutting rates too quickly rather than too slowly.
This isn’t expected to change, and signs that some inflationary pressures remain will likely prompt the MPC to maintain its guidance that further cuts in Bank Rate will be ‘gradual and careful’, said Swannell.
“While this is not a promise to continue to cut interest rates once per quarter, it seems likely that this trend will continue going forward. This is likely to be reflected in the Bank of England’s updated projections, which should show inflation settling around 2% in a couple of years, based on interest rates falling back to around 3.5% early next year,” he said.
With interest rates reduced to 4%, attention will be focused on any new guidance around how far the MPC thinks that interest rates could be cut.
“At the press conference after its February meeting, the Bank of England set out that interest rates could reach a neutral setting once they’ve hit a 2-4% range,” said Swannell.
“While the August meeting is probably too early for the Committee to break from its long-held ‘gradual and careful’ messaging, there will be a sharp focus on any potential new indications around how low interest rates could fall and when a change in guidance may take place.”
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