BoE keeps interest rates unchanged again - but a cut is coming

Although interest rates were kept unchanged today, the minutes of the meeting show the BoE to be closer to delivering a first rate cut than the markets had been anticipating.

By Stuart Cole | @Stuart Cole | 20 June 2024

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The widely expected no-change interest rate decision from the Bank of England (BoE) duly arrived today, delivered with an unchanged 7-2 vote seen in last month's meeting. But the commentary accompanying the announcement showed the Monetary Policy Committee (MPC) is becoming increasingly more dovish, with today's decision to keep rates on hold described as “finely balanced.” The key take-away is that the MPC appears closer to delivering an interest rate cut than the markets had been anticipating, boosting the chances of a first move being seen at the next meeting in August.

It is hard to read the minutes of today’s meeting and not conclude that the MPC is now within a hair’s breadth of delivering the first interest rate cut of this current cycle. The fact that the decision to keep rates on hold was “finely balanced” suggests that at least three of the seven Committee members who voted to keep rates on hold could be ready to join the two members who voted for a cut at the next meeting. This would give a 5-4 majority in favour of a rate cut. But perhaps even more importantly, it suggests the threshold for cutting rates, in terms of an acceptable rate of services CPI and wages growth, is lower than that which the markets had been anticipating. And this means we are closer to a rate cut - whenever that might come - than we were prior to today's decision. With the BoE in a data dependent mode, whether we get a cut in August or not could now rest solely on the numbers we get in next month’s inflation and employment reports (the reports for August will be released after the MPC has held its meeting for that month). And from the tone of today's minutes, it appears the MPC has widened the goal posts in terms of what it will deem acceptable as allowing rates to be cut.

However, the case for an August rate cut still has not been completely made. Today’s minutes showed the MPC dismissing the on-going strength being seen in wages growth on the grounds that the numbers are in line with the MPC’s forecasts. To facilitate a rate cut, this therefore suggests the July employment report is expected to show a significant fall in the pace of month-on-month wages growth, something for which there is little evidence around elsewhere at the moment to suggest will be the case. Meanwhile, the potential inflationary threat posed by services inflation – it overshot the MPC’s forecast in May by 0.4% - was explained away as being the result of indexing factors and volatility, somewhat weak considerations on which to base any kind of strong conclusions. Given this, the sense projected is one of the MPC trying to now fit the data to suit its own narrative, i.e., they are wanting to cut rates and are attempting to explain away any impediments to doing so that the economic data presents.

Overall, therefore, today’s MPC meeting has clearly paved the way for an interest rate cut to be delivered in August, and it is now a much closer call whether the MPC ultimately decides to go then or waits until September. On balance, we still favour a first cut coming in September; waiting just one more month would provide additional comfort that services inflation is definitively moving lower and that wages growth is similarly slowing. However, balancing August against September is now a much closer call, and we see the chances of an August cut being seen as now 50/50.

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Today's meeting has revealed the threshold for cutting interest rates, in terms of an acceptable rate of services inflation and wages growth, is lower than the markets had anticipated. The implication is that an interest rate cut is closer than had previously been thought.