The Bank of England (BoE) is expected to maintain the Bank Rate at 5.25% on August 1st, despite market expectations for a 25bp cut to 5.00%. The decision is anticipated to be very close, with a majority likely voting for no change. The addition of new member Clare Lombardelli to the committee further complicates the decision-making process. The meeting will include updated projections and a press conference.
Recent data has been stronger than expected, with activity picking up in Q1 and real wages experiencing a recovery. Service inflation remains elevated, and the labor market continues to loosen. Despite this positive data, the MPC is expected to adopt a dovish stance, preparing the markets for potential rate cuts in the future.
Communication from the MPC has been limited due to the UK general election. Members Bailey and Pill have consistently voted in unison since Pill joined the committee. The BoE is expected to make its first 25bp cut in September, with further cuts anticipated through 2024 and 2025.
In terms of foreign exchange, the EUR/GBP is expected to drop initially but may be limited by the dovish tone of the statement and press conference. The currency pair is likely to continue its downward trend driven by indicators of a modest global manufacturing rebound, tight credit spreads, and low FX volatility. The key risk factor remains any policy action taken by the BoE.
Overall, the BoE’s decision is expected to be finely balanced, with a dovish twist likely to be added to the forward guidance. The markets are preparing for potential rate cuts in the future, despite stronger-than-expected economic data. The EUR/GBP is expected to react to the announcement, but the downside may be limited by the overall dovish sentiment in the market.