Commuters pass the Bank of England building in the City of London. The BoE is likely to warn investors not to expect a string of back-to-back interest rate cuts if its policymakers push ahead with a first reduction in a knife-edge decision this week.
Most economists expect the UK central bank to reduce rates for the first time since the start of the pandemic on August 1, according to a Bloomberg survey. Many predicted a close vote and investors are even less certain, betting the chances of a quarter-point move lower at this meeting are only 45%.
Unlike previous cycles of monetary easing, the UK economy is expected to pick up momentum this year and next, leaving the risk of inflationary pressures. BoE Governor Andrew Bailey’s silence since May has left analysts guessing how the nine-member Monetary Policy Committee will balance concerns about wages and prices against the risk that the highest rates in 16 years strangle growth.
“The BoE is unlikely to give clear guidance on the future rate path or signal the start of a sustained cutting cycle,” said Sonali Punhani, UK economist at Bank of America. “It would keep the focus on the data to determine the timing of the next move.”
Even if the BoE cuts at this meeting, neither markets nor analysts expect a quick lowering in the benchmark rate. Investors have only priced in two quarter-point cuts this year, with the central bank noting that a loosening on Thursday would still leave rates in restrictive territory.
The MPC also appears divided over how to act, with some economists expecting a 5-to-4 split for a cut. Some officials, notably Chief Economist Huw Pill, Jonathan Haskel and Catherine Mann, have pointed out lingering price pressures, particularly in services inflation and wage growth. New forecasts on inflation will accompany the decision.
A cautious approach toward future cuts in the UK would echo the European Central Bank’s remarks, which earlier this month left its deposit rate on hold after beginning to loosen policy in June. Traders are leaning toward another reduction in borrowing costs in the eurozone in September.
Markets and economists have had particular difficulty predicting what will happen in the UK on Thursday. A cut threatens to reverse the pound’s rally in recent months.
Confidence in the decision has been decreased by a number of key swing voters on the MPC staying silent in recent months, largely because of a communications blackout during the election campaign.
“The Bank of England’s August policy decision is on a knife edge. It’s hard to have a strong conviction about the outcome of the August meeting but, on balance, we think a cut is more likely than a hold,” say Dan Hanson and Ana Andrade, Bloomberg Economics.
While it is speculated that Bailey is part of a group who were close to cutting rates in June, the Governor has not spoken publicly since before the election was called in May, except for a short statement released with last month’s decision.
Instead some economists are zeroing in on minutes from the June meeting that said the decision not to cut then was “finely balanced” for some on the MPC. The minutes also played down the significance of overshoots in services inflation, blaming volatile items in the basket.
“The BoE has left markets in the dark,” said Stefan Koopman, senior macro strategist at Rabobank. “After a false start to rate hikes in 2021, policymakers could have provided a little more guidance ahead of a potential first cut.”
He said the silence from Bailey and potential swing voters “leaves the August meeting wide open.”
The conflicting data and lack of BoE communications has left money-market pricing for the meeting uncertain. On Friday afternoon, traders were pricing in around 11 basis points of monetary easing, implying the market is split roughly down the middle on the likelihood of a cut.
That leaves the pound’s world-beating rally at the mercy of BoE officials, with sterling likely to fall if an interest-rate reduction materializes.
The pound is the best-performing major currency in the world so far this year, with much of that out-performance built on bets the BoE would keep rates high even as peers eased policy. The ECB has already began lowering its deposit rate, while the US Federal Reserve is forecast to cut at its September decision.
“The August meeting is likely to be a significant volatility event over which traders must manage risk,” said Michael Brown, a strategist at Pepperstone, who said it’s one of the most difficult decisions to forecast in recent memory. “Much will also hinge on both the vote split and policy guidance, particularly whether further rate reductions are explicitly mentioned.”
Related Story
