The Bank of England (BoE) has decided to keep the Bank Rate unchanged at 5.25% as expected. The vote split remained the same as in the May meeting, with 7 members voting for no change and Dhingra and Ramsden voting for a cut.
In its statement, the BoE maintained its previous guidance, mentioning that monetary policy could still be restrictive even with a rate cut, as the starting point was already restrictive. The Committee also stated that it would review how long the Bank Rate should be kept at its current level. The recent increase in service inflation was attributed to annual price adjustments and volatile components.
There was a clear division among the members, with some needing more evidence of diminishing inflation persistence before considering a cut, while others believed the policy decision was finely balanced. This division suggests a potential shift towards a majority voting for a cut at the August meeting.
Looking ahead to the August meeting, there will be limited data available, including one jobs report for May/June and the inflation report for June. Expectations are for easing inflationary pressures and stable wage growth, which could make the BoE more comfortable with a rate cut. However, there is a risk of a delay in the cutting cycle if there is a surprise increase in service inflation.
In the rates market, 2Y Gilt yields moved lower following the statement, but the overall reaction was relatively muted. Markets now anticipate a front-loading of cuts, with 16bp priced in for the August meeting.
After the statement, EUR/GBP saw an increase due to the dovish twist in the statement. While relative rates are negative for GBP, risks to both growth and inflation could complicate the BoE’s decision-making process. Political uncertainty in France also presents a downside risk to the EUR/GBP forecast.
Danske Bank expects the BoE to implement a 25bp cut in August, with potential for a later start to a cutting cycle. They predict another 25bp cut in November, totaling 50bp of cuts for 2024. The market is already pricing in 50bp for the remainder of the year, with the first 25bp cut fully priced by September.
Overall, the decision to keep the Bank Rate unchanged at 5.25% was in line with expectations, but the dovish twist in the statement suggests a potential rate cut in August. The BoE will continue to monitor economic indicators and inflation data leading up to the next meeting to make an informed decision on monetary policy adjustments.