Economic update: Bank of England – another dovish shift… but not quite ready to cut rates

As expected, the Monetary Policy Committee (MPC) again voted to keep rates on hold at 5.25%. There was, however, a further (dovish) shift in both the vote and general messaging. The vote was 7-2 to keep rates on hold with two members (up from one last time) voting to cut rates (with Ramsden joining Dhingra in the rate cut camp).

At their March meeting, some of the language in the minutes had already moved in a dovish direction (partly by adding that: “The Committee recognised that the stance of monetary policy could remain restrictive even if bank rates were to be reduced, given that it was starting from an already restrictive level.”). This time, it was more the description of the data/their interpretation that has moved things in a dovish direction, particularly: “key indicators of inflation persistence are moderating broadly as expected…” (though the second part of that sentence is “although they remain elevated.”) According to Bailey, they are making very good progress at returning inflation to target.

What are they waiting for? They still want more evidence before cutting

They have been wanting (along with other central banks) more confidence/evidence before cutting rates. That evidence will extend beyond headline inflation falling to around 2%. It is likely that inflation will fall to 2% in the April data published in a couple of weeks’ time. The focus in the minutes/press conference is on “inflation persistence” and sustainability. In other words they want to be surer that inflation is going to stay at/sustainably hit 2%. Note too that they do expect headline inflation to rise again in the second half of this year.

Some of those voting to keep rates on hold sound further away from cutting rates than others

Those voting to keep rates unchanged see restrictive monetary policy as “bearing down on inflation pressures.” Again, however, the minutes are clear that there is a “range of views” among these members – this time “around the assumptions on persistence embodied in the May CPI (Consumer Price Index) projection.” It is even clearer in this set of minutes that there are differing views about how likely a rate cut is in coming months: “There was also a range of views about the extent of the evidence that was likely to be needed to warrant a change in bank rate, and the degree to which these members anticipated that incremental information in forthcoming data outturns would lead them to update materially their assessment of inflation persistence.” As before, it isn’t clear how big each sub-group of MPC members is.

The general discussion around the data leant dovish – but in a cautious way

On services inflation for example, according to the minutes: “Services consumer price inflation had declined but remained elevated.” On the labour market: “the MPC judged that the labour market continued to loosen but that it remained relatively tight by historical standards.”

Too little priced in for cuts

The crude message you could take from their forecasts is that – in their central case – the market does not have enough rate cuts priced in. Their forecast has CPI inflation below the 2% target at the two-year and three-year horizons based on an interest rate profile which sees 150bp of rate cuts (taking Base Rate to around 3.75%) by mid-2027.

Cutting in June or August?

Taking into account the vote shift, forecasts, language and the views of the ‘on hold’ camp, they continue to move closer to a rate cut. According to Bailey: “It is likely we will need to cut bank rate over the coming quarters and make policy somewhat less restrictive over the forecast period.”

My central forecast is currently that they cut in August rather than June, but there is a lot of data to come before the June meeting (the meeting is relatively late in the month). Bailey sounds hopeful that more data will help them extract the signal from the noise in recent data. There is still a relatively high chance that they cut rates in June rather than August even if that isn’t my central case. Bailey was very clear that: “A rate cut in June is neither ruled out nor a fait accompli.”

There was even more of a sense that every meeting is ‘live’. There was language around taking a new decision each time. The same indicators continue to be stressed by the Bank: Indicators of labour market conditions, wage growth and services price inflation. They were also clear though that it isn’t just a question of where the data comes out compared to their forecasts, but also about how you interpret the data – what context you put around the data. It sounds like they are putting a lot of weight on insights from their agents and from discussions with business especially around how/whether cost increases (including the minimal wage increase) are being passed through to customers. In terms of the incoming data itself and how to weight it, it was also interesting that Ben Broadbent said he would probably be putting more weight on services inflation over short periods (because quantity indicators in the ONS labour market data were more uncertain than usual and given normal volatility in the wage data).

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