The Monetary Policy Committee (MPC) voted to keep interest rates unchanged. This was in line with expectations and consistent with market pricing, which assigned only a 6% probability to a cut today. The vote was not unanimous, with two members preferring an immediate easing of policy. We continue to expect the first rate cut in August, once the general election is over and inflationary pressures continue to ebb. Nonetheless, the language in the minutes implies continued caution against premature easing within the MPC.
Today’s decision was not accompanied by a revised set of forecasts. However, the data since May’s Monetary Policy Report have been hawkish on balance. May’s CPI inflation came in at 2% vs BoE’s forecast of 1.9%. Within that, services CPI inflation was 5.7% (BoE: 5.3%). GDP growth was stronger in Q1, coming in at 0.6% (BoE: 0.4%), with growth on track for at least 0.3% in Q2 even if activity stalls further over May and June (BoE: 0.2%). More timely survey evidence, including from the PMIs and consumer confidence, suggest a continued recovery across activity and sentiment.
The labour market data were more mixed. The unemployment rate ticked up to 4.4% in the three months to April, above the Bank’s forecast of 4.3% for Q2 overall. Regular pay growth was broadly in line with our expectations and suggested a somewhat modest impact of the 10% rise in the National Living Wage in April. Based on a standard wage equation, we estimate it to have boosted overall pay by around 0.1%, below the BoE’s earlier assessment of 0.3%. Nonetheless, the 3-month annualised pay growth increased to 6.9% – up from just 2.2% at the end of last year – and we now only expect it to return to its target-consistent level of around 3.5% in 2024 Q4, therefore remaining firmly in an inflationary territory.
The timings of the general election may have added another dimension to the rate setting process. The Bank has been following the Cabinet Office’s guidance to limit communications activities until after the election, which has prevented the MPC members from publicising their updated views on the economy and appropriate policy setting. While we don’t think an election itself – if the timing was known well in advance and the data justified it – should prohibit a particular change in interest rates, it is the absence of external engagement ahead of today’s announcement that was probably a more influential factor in staying put.
The minutes of the meeting nonetheless shed more light on the current composition of views on the Committee. The vote was split 7-2 (same as in May), with Dave Ramsden and Swati Dhingra preferring an immediate cut. Their justification pointed to the lags in monetary policy transmission (which would mean policy remaining as restrictive even after a cut) and downside risks to inflation in the medium term given the subdued outlook for demand.
Taken together, while headline inflation has been on a downward path, the latest data offer no conclusive evidence yet that it will remain sustainably at the 2% target. Nonetheless, further progress against the “three tests” of inflation persistence (services inflation, pay, and labour market tightness) would favour a gradual withdrawal of policy restrictiveness in the coming months. We maintain our view for a first rate cut in August, once the election fog is out of the way, with further easing likely in September and November.
Our view assumes more easing this year (75bps) than is priced in by the swap markets (45bps). Financial markets currently put a 35% probability on the BoE moving in August and 65% that it will wait until September. However, BoE officials have previously emphasised that even once Bank Rate is reduced, the stance of monetary policy will remain restrictive relative to its neutral level. While estimates of the latter are highly uncertain, market participants see the nominal equilibrium in the range of 3-3.5%, consistent with our own view. This should provide room for further easing once the first hurdle has been met.
