As the Bank of England’s Monetary Policy Committee (MPC) prepares to meet this Thursday, financial markets and policymakers alike are bracing for what could be a pivotal moment in the UK’s monetary cycle, Jeremy Batstone-Carr, European Strategist at Raymond James Investment Services, examines the forces shaping Thursday’s decision.
“The Bank of England’s Monetary Policy Committee (MPC) looks set to cut the UK base rate by 0.25 percentage points to 4.00% on Thursday, maintaining the quarterly pace that has seen four cuts since the current cycle began. An adjustment in the Committee’s policy setting is also expected.
The decision to cut rates again is likely to be far from unanimous and may possibly see a return of May’s three-way split. How the Bank couches its accompanying commentary will send a strong signal regarding its perception of the trajectories for economic activity and inflation in coming months, and by extension the interest rate pathway. The big question is whether the Bank is prepared to drop its long-standing “gradual” and “carefully calibrated” wording in favour of less optionality.
The MPC debate is likely to prove intense. Without doubt, the economy is subdued and May’s weak GDP outturn will likely force the Bank into a lower GDP estimate for the second quarter of 2025 ahead of the data’s official release on 14th August. Furthermore, recent labour market data points to a softening in employment conditions and a pronounced slowdown in the pace of private sector wage growth, on track to undershoot the Bank’s prevailing forecast. This may prove the decisive justification lying behind Thursday’s expected cut.
Contrarily, inflationary pressures as measured by CPI data have been building steadily since April’s increase in National Insurance Contributions and the national minimum wage. While the July data will not be released until 20th August, June saw CPI inflation running at 3.6% year-on-year against the Bank’s 3.4% prediction. Having previously anticipated that price pressures might peak at 3.7% in September, the forecast is likely to be raised to 4.0% or higher, a level that the more hawkish MPC members indicate could force households to push for higher wages.
Most MPC members are expected to see both sides of the argument and opt for a continuation of the slow, but steady, rate cut pace. But disagreements should be anticipated as members positions have become increasingly entrenched as key data points have become increasingly divergent.
As things stand, the financial markets are anticipating just shy of -0.5% points of rate cuts by year-end, implying that a further 0.25 percentage point cut by 31st December is very likely. No date has, as yet, been set for the Autumn Budget but with indications pointing strongly towards further tax hikes, the Bank may wish to opt for a monetary policy offset to ease the pressure on households and businesses, although not until much later in the year.”
