The Bank of England will be the third of the week’s biggest central banks to weigh in on Thursday. Markets are pricing half of a quarter-point cut so essentially a 50:50 coin flip for a 25bps rate cut. Bloomberg consensus is more convinced that a rate reduction will be delivered with above 70% of forecasters expecting a move.
Headline CPI has now hit the bank’s 2% target, but policymakers are more focused on other measures. Rates have been held at 5.25% since June last year, essentially due to services inflation and wage growth remaining well above the Bank of England’s projections. Thursday’s decision will hinge on a handful of MPC members who felt the prior decision was “finely balanced”.
Voting split to decide
The lack of recent communication from bank officials also adds significant uncertainty into the decision, so all eyes will be on the vote split. At the June meeting, seven MPC members including Governor Bailey, opted to hold with two (Dhingra, Ramsden) preferring a cut. Of the seven, two or possibly three are visibly resistant to cuts which leaves the rest in the middle who might go either way. Have they changed? We have only heard from a couple of hawks (Mann and Haskell) while Chief Economist Pill said, “we have to be realistic about how much any one or two releases can add to our assessment”.
Data since June
What has happened since then doesn’t offer clear support for a cut either, if the MPC remains more skewed toward data dependency over forecasts. GDP growth was solid at 0.7% q/q in the first quarter and 0.4% m/m in May. Core CPI over the past couple of months has been running a little hotter than like months in history.
Services inflation is similarly sticky, though the last reading at 5.7%, way above the MPC forecast of 5.1%, was caused by a spike in hotel prices and there is other noise in that print too. Core “services” inflation has fallen more aggressively this year and is tracking the MPC’s most recent forecast. Wage growth remains warm with the headline rate at 5.7%, while the PMI composite, manufacturing and services readings remain in expansionary territory.
Guidance and market reaction
The Bank of England is typically much more reluctant to comment on future policy than the likes of the ECB or Fed. Even if it does cut rates, expectations are for a fairly vague statement about future rate cuts without any commitment to timing or scope. The question is whether this is the start “normal” rate cutting cycle or something slightly different. Much will be dependent on services inflation falling and whether the resilient GBP has the wind taken out of it by a more dovish Bank of England. Markets are pricing 50bps for the remainder of the year with the first 25bp cut fully priced by November.
