-          MPC votes 5-4 in favour of lowering benchmark rate

-          Policy to remain restrictive for “sufficiently long”

-          Rates to be slowly lowered, but not by much

-          Staff expects moderate growth, falling inflation mid-term

-          Markets anticipate quarterly reductions

By Harry Daniels 

LiveSquawk News 

@HarryDaniels71  

01 August 2024 | 18:00 GMT 

LONDON – The Bank of England was the last of the three major central banks to announce monetary policy this week and went for option three: the Bank of Japan raised rates, the FOMC left theirs unchanged, and to underline the divergent paths, the British central bank duly obliged by lowering borrowing costs.

On Thursday, the BoE’s Monetary Policy Committee (MPC) reduced its main lending rate by 25 basis points to 5.00%. The decision, although expected, was voted in by the slimmest of margins, with a 5-4 majority in favour of cutting rates.

Governor Andrew Bailey, Sarah Breeden, and Clare Lombardelli joined longtime doves Swati Dhingra and Dave Ramsden in calling for the change. Four members – Megan Greene, Jonathan Haskel, Catherine Mann, and Huw Pill – voted against the proposition, preferring to maintain the bank rate at 5.25%, where it has remained for nearly a year.

The accompanying statement did little to advance the notion that the bank was about to embark on a rate-cutting cycle. “Monetary policy will need to continue to remain restrictive for sufficiently long until the risks to inflation returning sustainably to the 2% target in the medium term have dissipated further. The committee continues to monitor closely the risks of inflation persistence and will decide the appropriate degree of monetary policy restrictiveness at each meeting.”

Peter Arnold, EY UK’s chief economist, said that with one member now leaving and a replacement still to be announced, “Doubt around the composition of the committee (…) will add to the sense of uncertainty, with a good chance that there will only be eight members voting at September’s meeting.

“As the minutes make clear, this is far from a unanimous view, with the more hawkish members remaining concerned about the strength of underlying domestic inflationary pressures. This suggests that future decisions are likely to be equally close.”

The bank’s economic forecasts within the quarterly Monetary Policy Report (MPR) saw revisions to both price growth and GDP estimates.

Staff downgraded medium-term inflation forecasts but anticipated a rise in living costs over the remainder of this year, attributing the expected increase to “the prevailing persistence of domestic inflationary pressures.”

The outlook for GDP growth was adjusted higher in the near term; however, forecasters said underlying momentum appeared weaker. “Quarterly GDP growth is expected to fall back to 0.4% in 2024 Q3 and to 0.2% in Q4, broadly consistent with the current signal from surveys.”

The ensuing press conference was the first time markets had heard from Bailey since the last meeting; however, he failed to make up for the lost time.

Several analysts observed that the statement itself made no reference to the possibility of future cuts, simply explaining that rates needed to stay restrictive for "sufficiently long until the risks to inflation return" to target.

What the bank chief did say hinted at a slow, considered cutting cycle, and he warned that the new neutral for interest rates would be above previous levels. “We need to make sure inflation stays low. We will not cut rates too much or too quickly.”

Nomura’s George Buckley said that the bank intended to set rates on a meeting-by-meeting basis without any explicit forward guidance. “We expect further slowing in services inflation and pay pressures, alongside a gradually softening labour market, should allow the bank to cut again in November and at a quarterly pace (at MPRs) throughout 2025 and into early 2026 until neutral rates (around 3.50% in our view) have been reached. Strong economic growth and sticky inflation present upside risks to this rate view.”