Bank of England Keeps Rates Unchanged In "Dovish Hold", August Rate Cut On Deck

Unlike the SNB, which unexpectedly cut rates earlier this morning (full breakdown coming shortly), the Bank of England did not surprise markets and kept rates on hold at a 16 year high of 5.25%, even as it hinted that more policymakers may be close to backing interest rate cuts, keeping alive hopes of a loosening by the end of the summer.

The panel voted 7-2 in favor of no change for a second consecutive meeting, with Swati Dhingra and Deputy Governor Dave Ramsden both backing a cut again. However, there were divisions among the majority about the importance of recent data that showed surprisingly strong services inflation.

Minutes of the meeting said the decision not to cut rates was “finely balanced” for some of the nine members of the Monetary Policy Committee; the minutes of the meeting showed that some members believed that recent data “did not alter significantly the disinflationary trajectory that the economy was on.” That would suggest BOE officials are increasingly comfortable that they can start to reduce rates, which the MPC says is weighing heavily on the economy. Indeed, according to BBC's Feisal Islam, the decision was “finely balanced” for 3 holds, probably including Governor, which mean it was a close run thing not to cut. "Those 3 members playing down sticky services inflation... August cut very much on"...

... which would have political implications because with a lower services inflation print on the day Sunak called the election, "he may well have got a rate cut 2 weeks before polling day…"

According to Bloomberg, there were indications that some MPC members, possibly including Governor Andrew Bailey, may be close to cutting rates, which have been on hold since last September. While the formal guidance to investors was unchanged, the language from some rate-setters on the latest decision being on a knife-edge could lead to more backing a reduction in August. Others noted the risks from stubborn domestic price pressures in the services sector despite headline inflation falling to the BOE’s 2% target for the first time in almost three years in May.

Bailey said in comments released alongside the minutes that the drop in inflation to 2% is “good news.”

“We need to be sure that inflation will stay low and that’s why we’ve decided to hold rates at 5.25% for now,” he said. It was the only comment from a BOE policy maker since Prime Minister Rishi Sunak called an election for July 4. BOE rate-setters have been silent during the campaign, meaning investors went into the June meeting with little insight from officials about how recent data surprises are affecting thinking on Threadneedle Street.

“This is clearly a dovish hold,” said Neil Jones, a foreign-exchange salesperson to financial institutions at TJM Europe. “The narrative from Bailey suggests for some, they are close to cutting.”

The BOE said it expects GDP growth to much stronger in the second quarter after the sharp rebound from last year’s recession. It now forecasts growth of 0.5% in the second quarter, up from its May forecast of 0.2%, continuing the strong start to the year. That upgrade is based on business surveys. While the UK economy bounced back from last year’s recession in the first quarter with solid growth of 0.6%, data for April showed the recovery grinding to a halt. Private sector forecasters expect a pick-up from the 0.1% growth in 2023 to a still-anaemic 0.7%.

While inflation fell to the BOE’s 2% target, market bets on rate cuts in 2024 have retreated in recent months after stickiness in wages and services prices — key indicators being watched by policymakers.

Both services inflation and wage growth are running at levels seen as too high for the central bank to hold price growth at target sustainably. In its most recent forecasts, the BOE had expected services inflation to have eased to 5.3% by May but data on Wednesday showed it at 5.7%. As a result, investors had reined in bets on rate cuts over the summer and now expect just one in 2024, down from as many as six at the start of the year.

Traders saw the statement as a signal that the BOE was willing to cut in coming months and moved to price more than a 50% chance of a reduction in August, from 32% before the meeting. Markets also increased the amount of easing expected for the year to 48 basis points from 43 basis points previously. Gilts gained and the pound slipped.

“We expect the MPC to cut rates in August, but this is not a done deal,” said Alpesh Paleja, interim deputy chief economist at the CBI. “They remain very data-driven, so the evolution of key indicators over the coming month will be key. Furthermore, the pace of any rate cuts beyond August is likely to be gradual.”