The Bank of England’s decision tomorrow is anticipated to be “very close,” according to UBS, which predicts a 5-4 vote in favour of the first-rate cut of the cycle.
Current market pricing indicates a 60% chance of no rate cut at this meeting.
“The key reason we expect the MPC to cut rates is the recent data,” writes UBS economist Anna Titareva.
Specifically, June inflation of 2% aligned with the BoE’s May projections, the 5.7% overshoot in services inflation in June was mainly due to volatile components that “should not impact the medium-term inflation outlook,” and July’s labour market data showed more pronounced signs of a slowdown in wage growth.
ING economist James Smith noted that markets viewed the 1 August MPC meeting as a “50:50 call” between a 25bp rate cut and maintaining the current rate.
“We’re leaning towards a cut, though we agree nothing is for certain,” he said, emphasizing that the decision will hinge on a few committee members who previously felt the June decision was “finely balanced.”
Both economists acknowledge the difficulty in gauging the Monetary Policy Committee’s stance due to a lack of recent communication pushing back against current market pricing. Titareva suggested this makes a delay in the cut until the 19 September meeting more likely.
Recent comments by Jonathan Haskel, Catherine Mann, and Huw Pill indicate they will vote to hold rates steady, with Megan Greene likely also voting for no change, according to UBS’s Titareva. On the other hand, Swati Dhingra and Dave Ramsden are expected to continue voting for a cut, as they did at the last meeting.
This leaves BoE Governor Andrew Bailey and Deputy Governors Sarah Breeden and Clare Lombardelli as the swing votes.
This is Lombardelli’s first MPC meeting, replacing Ben Broadbent on 1 July.
“While we think that Bailey and Breeden could be the MPC members for whom the decision was ‘finely balanced’ last time and hence they could be ready to cut in August,” said Titareva, “little is known” about Lombardelli’s voting intentions.
In his last press conference in May, Bailey raised the possibility of cutting rates faster than markets expected at the time, “a rare statement of intent” that “suggests he is keen to get on with the job of cutting rates,” said Smith.
With only two MPC members voting for a cut last time, Smith sees three members as reluctant to cut yet, leaving “four or five in the middle, and history suggests they tend to move as a group.”
If the committee does cut rates this week, expect a “fairly vague” statement on future meetings, Smith added, with the dovish risk scenario that Governor Bailey might make similar comments in his press conference to those he made in May, hinting more directly at what comes next.
