Bank of England Rates Decision: What to Expect on June 20

Alongside
the
statement,
one
clue
will
come
from
the
voting
patterns:
last
month
seven
members
of
the
monetary
policy
committee
voted
to
hold,
while
two
voted
for
a
cut.
It’s
likely
that
more
of
the
MPC
join
the
cut
cohort,
but
probably
not
enough
to
force
a
decision.

Money
markets,
as
measured
by
overnight
index
swaps,
suggest
that
August
1
is
still
the
most
likely
date
for
the
Bank
of
England
to
make
its
first
rate
cut
since
2020.

August
seems
more
likely
from
the
point
of
view
of
the
Bank’s
calendar;
the
quarterly
monetary
policy
report
and
press
conference
give
policymakers
more
scope
to
explain
decisions.

General
Election
is
Hard
to
Ignore

The
looming
election
is
also
a
factor.
While
the
Bank
is
proud
of
its
political
neutrality,
common
sense
would
lean
towards
waiting
until
after
the
election
on
July
4
to
make
a
decision
on
interest
rates.
Opinion
polls
suggest
a
new
government
will
be
in
power
by
the
time
the
Bank
next
meets
in
August,
and
that
will
change
the
dynamic
of
economic
forecasting,
with
new
tax
and
spending
plans
in
place.

In
recent
years,
the
Bank’s
monetary
policy
and
government
fiscal
policy
have
notionally
worked
in
tandem.
While
shadow
chancellor
Rachel
Reeves
has
ruled
out
an
emergency
budget
on
coming
to
power,
the
Labour
party
is
likely
to
make
significant
changes
to
the
economy
this
and
next
year.

But
there
is
the
chance
of
a
surprise
cut
in
June,
says
Morningstar’s
European
market
strategist
Michael
Field,
with
inflation’s
fall
backing
the
case.

“Although
the
majority
of
economists
are
predicting
the
first
rate
cut
in
August,
that
majority
is
slim.
In
fact,
a
recent
Reuters
poll
had
more
than
40%
of
economists
suggesting
this
long-awaited
rate
cut
would
actually
come
in
June.” 

Does
the
Data
Back
a
Rate
Cut?

In
terms
of
UK
economic
data,
not
too
much
has
changed
to
tip
the
balance
towards
a
cut.
On
the
side
of
“hold”,
services
sector
wage
growth,
a
concern
of
Bank
officials,
is
still
high.
But
May
inflation
is
expected
to
have
hit
the
2%
target,
according
to
FactSet
consensus,
in
data
to
be
released
on
June
19.

The
UK
economy
posted
no
growth
in
April,
the
ONS
said,
so
a
rate
cut
could
be
justified
as
a
stimulus
for
a
struggling
economy.
Unemployment
is
also
on
the
rise,
albeit
from
low
levels.

After
all,
base
rate
has
held
at
5.25%
since
August
2023,
which
gives
policymakers
plenty
of
time
to
see
the
“transmission”
effects
of
the
14
rate
rises
since
2021
in
the
real
world.
Since
then,
inflation
has
fallen
dramatically,
as
it
has
done
in
the
eurozone
and
US.

There
is
also
the
argument
that
UK
interest
rates
are
too
high
relative
to
inflation:
UK
CPI
is
2.3%,
while
the
base
rate
is
5.25%;
in
the
eurozone
CPI
is
2.60%
and
the
deposit
rate
is
3.75%
after
the
recent
cut.
Last
month,
the
Bank
of
England
governor
Andrew
Bailey
that
even
after
one
rate
cut,
monetary
policy
remains
restrictive.

“With
current
rates
as
high
as
5.25%,
there
is
plenty
of
room
for
manoeuvre,”
says
Morningstar’s
Field.

Central
Bankers
Turn
Cautious

Globally
the
interest
rate
environment
has
shifted
since
the
Bank’s
last
meeting:

the
European
Central
Bank

did
cut
rates
last
week,
but
markets
re-priced
the
odds
of
a
follow-up
cut
after
the
ECB
raised
its
inflation
forecasts.
In
the
US,

the
Federal
Reserve
held
rates
on
June
12
and
signalled
that
there
would
be
one
rate
cut
this
year;
that
said,
Morningstar’s
chief
economist
Preston
Caldwell
says
that
we
could
see
two
or
more
cuts.

While
CPI
is
higher
in
the
US
than
the
eurozone
and
UK,
the
key
message
from
central
bankers
is
that
inflation
is
proving
hard
to
banish
and
may
even
be
gathering
for
a
second
wave.
The
Bank
of
England
is
likely
to
echo
this
cautious
tone
in
its
statement
next
week,
but
it
may
well
lay
the
groundwork
for
a
cut
later
in
the
summer.
If
inflation
does
fall
to
target
and
stay
there,
as
expected,
the
pressure
will
to
increase
on
the
Bank
in
the
coming
months
to
act.

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