UK reaction: June cut remains firmly on the cards.

The MPC left Bank Rate unchanged at 5.25%, as was widely expected, though an additional member, Ramsden, joined Dhingra in voting for a 25bp cut, from no-change previously. This was a more dovish split than the market consensus. The remaining seven continued to vote for no-change, though the minutes highlighted that there was a “range of views” about the risks to the inflation outlook, suggesting some members are close to voting for a cut. The admission that the MPC would “consider forthcoming data releases and how these inform the assessment that the risks from inflation persistence are receding” suggests June is on the cards if the economic data materialise as expected over the next couple of months. Governor Bailey also added at the press conference that June’s meeting is “neither ruled out nor a fait accompli”; the upcoming data releases are clearly key.

We think that members close to changing their vote will want to see only mild upward pressure on wage growth from the near-10% increase in the National Living Wage this spring. Look out for the April average weekly earnings data (released 11 June) – the Bank expect to see headline growth in the ex. bonus measure average 5.6% in Q1 and 4.6% in Q2 – and the Bank of England’s agents’ scores (released 20 June). With regards to inflation, the three members needed to tilt the scales in favour of a cut will want to see CPI inflation fall to 2.1% in April (released 21 May) and then to 1.9% in May (released 18 June). In addition, services inflation will need to fall at least in line with the MPC’s expectations - the Committee anticipates a drop to 5.5% and 5.3%, respectively – to quell concerns over the persistence of inflation among the majority of members.

More broadly, the MPC’s new inflation forecasts were slightly softer than expected and were consistent with multiple cuts to Bank Rate this year and next. Indeed, the Bank expects inflation to fall to 1.9% in two years’ time and to 1.6% in three years’ time, if it assumes Bank Rate falls to 4.79% in Q4 2024 and to 4.26% by end-25, as priced-in by markets in the run up to this meeting. A much sharper decline to 1.3% and 0.9%, respectively, is expected if Bank Rate remains at 5.25%. It is impossible to be concise, but the latest forecasts point to at least one more rate cut over the next 12 months than markets currently have priced in, based on these alternate paths for inflation.

Today’s meeting has not changed our view that a June cut seems most likely. Yes, the data are key and the MPC may of course feel more comfortable waiting for the next forecast meeting in August to start cutting. But on balance we think the MPC’s near-term forecasts look reasonable and expect to see both wage and inflation data materialise along these lines. Note too that slight upward deviations likely won’t throw a spanner in the works, given the emphasis on volatility by Governor Bailey in the press conference. Indeed, though the recent data have come in slightly stronger than expected, Bailey suggested these were within the normal bands expected. Whether the first move comes in June or August, we remain confident that the Bank will push through 75bps of easing this year, we now forecast additional cuts of 25bp in September and November. 

Looking ahead, the Bank of England likely will be forced to cut more quickly than many anticipate next year to offset tighter fiscal policy, regardless of which party wins the General Election (which we continue to think will be held in Q4). Indeed, if the current fiscal rules remain in place – which both the major parties have agreed will happen – either taxes will have to be increased or spending cut given the minute amount of headroom, hard choices that leaders will want to get out the way at the beginning of any new term.  As a result, we see the Bank continuing to ease policy - albeit at a slower pace - into the second half of 2025, and now look for a year-end target of 3.25%, compared to 3.75% previously.

Markets reacted modestly to the news. The 2-year yield dropped to 4.265% during the press conference, from 4.292% and the 10-year yield to 4.131%, from 4.160%, both have since rebounded to 4.281% and 4.151%, respectively.