MPC members voted 7-2 in favour of the Bank of England (BoE) maintaining its official Bank Rate at 5.25% (16-year peak) for a seventh consecutive meeting (Swati Dhingra and Deputy Governor Dave Ramsden voted for a cut for the second successive meeting).

Ultimately, the decision/votes were as expected, though the rate statement’s language was largely considered a ‘dovish hold’. MPC members judged today’s decision as ‘finely balanced’, with the rate statement emphasising that some MPC members are potentially preparing to vote for a cut. However, despite this, some members still demand more ‘evidence’ of disinflation.

Dovish Rate Repricing

The immediate aftermath of the rate announcement triggered a dovish repricing in rates. 15 basis points of easing are now priced in for August’s meeting (circa 60% implied probability of a cut) compared to 10 basis points before the BoE announcement. September is pretty much fully priced in for a 25-basis point cut (24 basis points). Regarding GBP, sterling slipped versus the US dollar (GBP/USD fell -0.2% immediately after the release) and gilts rallied.

Source: Bloomberg (WIRP)

The accompanying rate statement maintained the message that policy ‘will need to remain restrictive for sufficiently long to return inflation to the 2% target sustainably in the medium term in line with the MPC’s remit’.

The statement also noted that the general election on 4 July ‘was irrelevant’ to its rate decision.

Regarding how much more evidence was needed to begin easing policy, the rate statement communicated that ‘there continued to be a range of views’ among MPC members about ‘the extent of accumulated evidence’ needed to warrant a reduction in the Bank Rate.

However, the minutes also showed that for some MPC members, ‘the upside news in services price inflation relative to the May Report did not significantly alter the disinflationary trajectory that the economy was on’.

BoE Governor Andrew Bailey commented that inflation at 2.0% was ‘good news’ but expressed the need for inflation to remain low to begin reducing the Bank Rate.

There was no press conference following the rate announcement.

Services Inflation and Wage Growth Remain Elevated

The latest rate decision follows yesterday’s key CPI inflation numbers, which were mainly in line with market expectations.

Headline CPI inflation cooled to +2.0% in the twelve months to May, matching market expectations and officially hitting the BoE’s inflation target. This is quite the milestone, considering UK inflation was +11.1% in October 2022. YoY core inflation also equalled expectations, easing to +3.5% in May, down from the +3.9% print recorded in April. Headline inflation was unchanged MoM, rising +0.3% and slightly softer than the expected +0.4%. Meanwhile, MoM core data slowed to +0.5% as forecast, from +0.9% in April.

Services inflation and wage growth are still proving problematic or sticky. Although services inflation eased to +5.7% in May from April’s +5.9%, the release was still 0.2 percentage points north of the market’s median estimate (+5.5%) and above the +5.3% BoE May forecast. Wage growth remained unchanged in the three months to April (3MYY); pay that excludes bonuses remained at +6.0%, matching both expectations and prior data, while pay including bonuses came in at +5.9%, equalling previous data but slightly higher than market expectations.

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