Bank of England cuts Bank Rate again, but pace of future cuts unclear

The market consensus, and our own expectation, had been that there would be a three-way split across the MPC, with five votes in favour of a 25bp cut, two votes for a 50bp cut and two votes for no change.

In the event, five committee members did support the majority decision, but there were four dissenters who would have preferred rates to be kept on hold. The decision also required two rounds of voting by the committee, which is unprecedented for the MPC.

The vote split gives a hawkish message, which fits with the overall tone of the minutes of the meeting and of the quarterly Monetary Policy Report, which have also been published.

What struck us in the minutes was that even some of the members who voted for a rate cut this time were more worried that the pace of underlying disinflation could slow – a concern that is obviously shared, and carries even more weight, for the four members who voted for rates to be kept on hold.

This, by and large, reflected domestic considerations rather than global influences. Even with slightly lower wage growth than the MPC had forecast, the persistence in service price inflation in particular is troubling the committee members.

In its baseline forecasts in the Monetary Policy Report, the MPC maintained its forecast that the current quarter will see the peak in inflation but now sees this peak higher at 4.0% in September (previously it was 3.7%), with inflation only back to its 2.0% target by Q2 2027, a quarter later than forecast in May.

A key concern for the MPC is that high food price inflation could sustain household inflation expectations, which are still elevated, for longer, raising questions about how soon the MPC should revert to lower rates.

Moreover, it is not just households’ inflation expectations that are troublesome. These, we think, may be less of an issue than is made out; in a progressively looser labour market, it could well become harder for households to achieve their desired degree of compensation for higher living costs through higher wages.

However, those four MPC members that voted for rates to be kept on hold also noted business inflation expectations to have remained elevated. Given that it is businesses that set prices, it is understandable that the MPC is doubting the degree of disinflation that can be expected, even with looser labour market conditions amid muted growth prospects.

The minutes noted that ‘the timing and pace of further reductions in the restrictiveness of policy would depend on the extent to which underlying disinflationary pressures would continue to ease’.

Although Governor Bailey, in his press conference, indicated clearly that he considers rates to still be on a downward path and the MPC collectively maintained its promise of a ‘gradual and careful’ approach to further cuts, the timing and degree of rate reductions is now less clear.

Bailey also stated that the MPC would do ‘whatever it takes’ to return inflation to the medium-term target of 2.0%.

For this to play out, the burden of proof has shifted: for the MPC to stick to the once-per-quarter pace of 25bp rate cuts, there will need to be evidence that disinflation in the service sector is continuing, not just that the jobs market is loosening.

The views expressed are those of the contributors at the time of publication and do not necessarily represent the views of the firm and should not be taken as advice or recommendations.