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Bank of England: The first cut

01 August 2024

Please note: The article does not constitute advice or any form of investment recommendation. All numbers quoted were sourced from Bloomberg data as of 1 August 2024. Past performance is never a guarantee of future performance.

In a long-awaited move, the Bank of England’s Monetary Policy Committee (MPC) cut interest rates from 5.25% to 5.0% at its meeting earlier today. This marks the first rate cut since March 2020, with rates having been held at a 16-year high since August 2023. 

In the minutes of its previous meeting in June, the MPC had signalled a rate cut was likely to be forthcoming in August. However, economists and investors were divided on the outcome, with markets pricing in less than a 60% chance of a cut ahead of the meeting. 

The decision will likely provide welcome relief to borrowers and homeowners, who will be hoping to see similar moves in the credit and mortgage markets.

A close call  

The decision proved a close call – the vote was split 5-4 in favour of a cut, with four members voting to keep them unchanged. Opinion was mixed on whether inflation is truly in check, and even for some of those who voted for the cut, the decision was “finely balanced” according to the meeting minutes1

Headline consumer price inflation (CPI) was in line with the central bank’s 2% target in May and June, but is expected to rise later this year due to increasing energy prices. Meanwhile, services inflation – a key domestic pricing pressure – has remained elevated (at 5.7% year-on-year) and real wage growth continues to outpace inflation. 

On the growth front, the UK economy has been stronger than expected in recent months, although it remains weak, but the softening labour market and weaker retail sales suggest this may not last. 

A cautious tone 

Reflecting this delicate balance, the accompanying statement struck a cautious tone, presenting the cut as a reduction in restrictiveness rather than an easing: “It was appropriate to reduce slightly the degree of policy restrictiveness. The impact from past external shocks had abated and there had been some progress in moderating risks of persistence in inflation.”2

It also noted that upside inflation risks remain on the horizon: “Domestic inflationary persistence is expected to fade away over the next few years, owing to the restrictive stance of monetary policy. However, there is a risk that inflationary pressures from second-round effects will prove more enduring in the medium term.”3

The mood elsewhere has been similarly cautious. The US Federal Reserve opted to keep rates unchanged this week, but has opened the door for a cut in September, if labour, growth and jobs data remain supportive. While the European Central Bank did deliver a cut in June, it kept rates on hold in July on concerns around services inflation. 

More cuts to come? 

Many will be hoping that today’s rate cut is the first of many. Markets are certainly optimistic for additional cuts this year, currently pricing in two more quarter-point cuts over the rest of 2024. However, Bank of England Governor Andrew Bailey stated he wants to avoid cutting rates “too quickly or by too much” to ensure inflation remains low4.

Any future interest rate decisions will remain data-dependent and made on a meeting-by-meeting basis. The central bank will want to be sure that inflation is under control before committing to any further cuts. 

We expect the MPC to pause at its September meeting, before cutting rates again in November to 4.75%. However, given ongoing inflation risks and uncertainty around the growth outlook, it could be another close call, and much could change in the next few months.  

Keeping you informed 

As always, we will keep you updated on market developments – whether through our articles, podcasts or our Monday morning client email. Meanwhile, our in-depth Market Perspectives report will return in early September. 

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