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As widely expected, the Bank of England maintained Bank Rate at 5.25% at today’s meeting. The vote split within the Monetary Policy Committee remained unchanged from May, with both Dhingra and Ramsden advocating for cuts to leave it 7-2 in favour of a hold.
The lack of changes didn’t end there. While recent data have arguably lent in a hawkish direction, this has not deterred policymakers from largely running back the messaging delivered in May, which at the time was perceived as dovish and guided markets towards pricing a rate cut at today’s meeting. This ultimately did not play out given that the data failed to play ball, as we suspected at the time due to stickiness in wage and services data, but we are inclined to view today’s messaging in a broadly similar manner as to how markets interpreted May’s decision.
This leaves us continuing to favour August as the first rate cut from the BoE. Markets now increasingly share this view as well, with odds of an August rate cut rising from 35% this morning, to more than 60% post-announcement.
Pricing of a rate cut from the BoE in August rises above 50% again today after markets trimmed the odds in recent weeks following hawkish data surprises
Whilst the policy statement itself was broadly similar to the May edition, there were still some points of note in today’s messaging. Perhaps the most meaningful change came in the meeting minutes, where there is now a clear three way split amongst the MPC.
The first group, including Dhingra and Ramsden, have seen enough to begin cutting rates already, noting that inflation is now back to 2%. Meanwhile, on the hawkish wing of the committee – which we assume encompasses Mann and Greene plus perhaps one or two others—there is still a view that more evidence of diminishing inflation persistence is needed before reducing the degree of monetary policy restrictiveness. The core of the MPC, however, noted that this latest policy decision was “finely balanced”. Significantly, they suggested that the upside surprises since May did not alter significantly the disinflationary trajectory. Instead, this group attributed the recent surprise in services inflation to regulated components in the basket and April’s increase in the National Living Wage, the effects of which they expected to dissipate in the coming months. This suggests a willingness to look though the recent inflation resilience, opening the door to a cut in August.
In fact, an increased willingness to dismiss signs of inflation persistence was a theme of both the policy statement and the minutes.
In particular, the minutes note that evidence on cost passthrough is “mixed”, in contrast to the May policy statement which suggested that passthrough would be lower in the face of weak demand. Yet despite this, there also appears to be a growing inclination to see the recent uptick in price growth as transitory, as evidenced by the view shared amongst the core of the Committee. Moreover, the Bank seems to be moving away from its overwhelming data dependence of recent years, suggesting that “As part of the August forecast round, members of the Committee will consider all of the information available and how this affects the assessment that the risks from inflation persistence are receding.”
To us this suggests that that the MPC is becoming comfortable with its forecasting ability once again, a dynamic that Governor Bailey had hinted at prior to the suspension of MPC communications due to the general election campaign.
If we are right, this should see the BoE also become more comfortable with the idea of cutting rates come August, when election uncertainty will be reduced, policymakers will have another Monetary Policy Report to hand, and the impacts of Aprils price resets have begun to fade.
We suspect this is now the base case within the BoE as well, alluded to by the minor tweak in the policy statement’s forward guidance, with monetary policy needing to remain “restrictive” as opposed to “sufficiently restrictive” in May.
Author:
Nick Rees, FX Market Analyst