The Bank of England in the City of London.
Mike Camp | In Pictures | Getty Images
LONDON – Britain’s inflation rate may have hit the Bank of England’s 2% target directly in the past two readings, but that may still not be enough to give the central bank enough confidence to cut interest rates this week.
Market pricing on Wednesday morning showed a 60% chance of a rate cut at the Bank of England’s August 1 meeting. That’s far less confident than traders were before the ECB announced a rate cut in early June. The Fed’s first rate cut of this cycle in September has been priced at 100%.
One reason for this uncertainty and the relative lack of strong signals from the Bank of England is the divisions among the members of its voting Monetary Policy Committee.
The Monetary Policy Committee described its decision to hold interest rates in June as a “delicate balancing act”, with some members worried about wage growth and rising services sector inflation, while others were more concerned about the broader deflationary trajectory.
In May and June, seven MPC members voted to keep rates unchanged and two members voted for a 25 basis point rate cut. The Bank of England statement also addressed disagreements over the level of data needed to support monetary easing.
Over the past two years, overall UK inflation has soared higher than in the United States and the euro zone, but has also cooled faster.
However, price growth in the country’s dominant services sector remained strong at 5.7% in June, higher than the Bank of England’s forecast. Core inflation, which excludes energy, food, alcohol and tobacco, remained at 3.5%.
The Bank of England will also weigh the impact of recent UK economic growth and UK economic growth. GBP.
Another factor is For those trying to speculate on its next move in limiting central bank communications during the six weeks between May 23 and July 4, when the UK holds a general election – including during the June 20 meeting – this puts things into perspective. It gets even more confusing.
Since then, rate setter Jonathan Haskel – considered one of the most hawkish members of the MPC – said in a speech on July 8 that shocks to the wage-price system continued to weigh on the UK economy. The labor market is “tense and unstable”.
“I would prefer to keep rates on hold until we are more certain that underlying inflationary pressures have continued to subside,” Haskell said.
Circumstances that require reduction
Despite this caution, many economists and analysts believe the doves will prevail on Thursday.
“We favor a cut, although we agree that nothing is certain… We have heard very little from officials since the election in June, which means it is difficult to gauge how they interpret the recent upward trend,” Dutch bank ING said. The Bank of England is generally more cautious in its forward guidance than the Federal Reserve or the European Central Bank, it said in a research note on Monday.
ING’s James Smith said the vote would be between four or five centrist members, who tend to act as a group and are more likely to influence the decision to cut rates as policymakers focus on longer-term deflationary trends rather than recent ones. noise”.
But Smith said a lack of certainty could lead to significant market volatility on Thursday, while the start of the BoE’s easing cycle would “create headwinds for a recovering pound”.
Matthew Ryan, head of market strategy at Financial Services, said the August meeting “provides the ideal opportunity for a first rate cut” as it will be followed by the release of the quarterly monetary policy report and press conference, allowing the MPC to explain its plans in detail. The decision was made by Ebury in emailed comments Tuesday.
“As this is not yet fully priced in, an immediate rate cut could trigger some downside in sterling, although a series of upbeat communications, particularly a significant upgrade to GDP forecasts, may limit the extent of any sell-off,” Ryan added.
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