Vanguard previews this week’s BoE decision: MPC ‘itching to cut’ but Vanguard sticking to August for the first interest rate move

According to Shaan Raithatha, Senior Economist at Vanguard, the bottom line is that “The MPC will keep Bank Rate on hold at its June meeting (7-2 split vote), and guidance on the near-term policy outlook will likely remain unchanged. Since the May meeting, inflation, wage, and growth data have all surprised to the upside. That said, forward-looking indicators on services prices and pay growth point to a significant moderation in the months ahead as the labour market softens. We continue to call for an August rate cut, with a quarterly cadence of easing thereafter. The MPC are itching to start cutting rates as soon as the data allows. Risks are skewed towards a later, and slower, trajectory of easing.”

Explaining in more detail, Raithatha said that the Bank’s Monetary Policy Committee (MPC) will leave policy unchanged on Thursday. He believes that Dhingra and Ramsden are likely to continue call for a rate cut, implying another 7-2 vote split amongst the committee members. Guidance on the timing of the first cut will probably not change, with the phrase “the MPC will consider forthcoming data releases and how these inform the assessment that the risks from inflation persistence are receding” remaining in the statement.

“The challenge for the Bank is that inflation appears to be easing more slowly than expected. Since the May meeting, data on inflation, wages and growth have all surprised to the upside:

  • CPI: Services CPI surprised by +0.4ppts in April. Although there is expected to be a moderation when May’s numbers are released on Wednesday, a consensus-print would still imply a +0.2ppts surprise to the Bank’s latest forecast (see here).
  • Wages: Private-sector wages grew at 5.8% year-on-year in the three months to April and is on track to exceed the MPC’s Q2 forecast by 0.2ppts. This is partly driven by April’s 9.8% increase in the National Living Wage.
  • GDP: Growth surprised significantly to the upside in Q1, with a 0.6% quarterly print. Activity surveys suggest the Bank will probably need to upgrade its Q2 forecast by 0.2ppts to 0.4%.

“However, the news has not all been one-way. The three-month unemployment rate unexpectedly rose to 4.4% in April, 0.1ppts ahead of the Bank’s Q2 forecast. What’s more, a flurry of forward-looking indicators, which some MPC members are attaching increasing weight too, suggest a moderation in inflation pressure ahead:

  • BoE Decision Maker Panel:  Businesses’ expectations for selling prices and wage growth declined further in May, with both expected to settle around 4% in 12-months’ time.
  • PMI output prices: The fall in the S&P Global/CIPS services prices output balance in May is consistent with services inflation easing from 5.9% in April to about 4.0% in the coming quarters.
  • HMRC median earnings and the KPMG/REC survey: point to a continued easing in wage growth over the coming quarters.

“As such, we continue to call for an August start to rate cuts; and a quarterly cadence of easing thereafter. This would leave Bank Rate at 4.75% by year-end and 3.75% in Q4 2025. Risks are skewed towards a later and slower pace of easing given still elevated, and sticky, services inflation.”

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