• Bank Rate cut to 5.00% from 5.25% in August in a split decision by MPC
• Inflation remains at 2.0% target, but high services inflation remains a concern
•  GDP growth higher than expected at 0.7% in 2024 Q1, further adding to inflation risks
• Mortgage market holds steady and may see boost from cut in rates in coming months
   

Bank Rate cut to 5.00% but inflation risks remain high

1. In a knife edge decision the MPC voted to cut the Bank Rate from 5.25% to 5.00% on 1 August – the first cut since the start of the Covid pandemic in March 2000. Five members, including the Governor, voted for a cut, whereas 4 voted to maintain the rate at 5.25%. The Minutes to the MPC meeting reveal that the decision was finely balanced for the 5 members voting for a cut however they believed that enough progress had been made in moderating the risks of persistent inflation to warrant a slight easing in monetary conditions. At 5.00% monetary policy remains in restrictive territory.
    
2. In a press conference following the announcement, the Governor acknowledged a subtle repositioning of the committee’s approach. Whereas previously the committee have focused on specific data releases, in particular services inflation and labour market indicators and how this might affect CPI inflation, this time they are considering a wider framework of data to describe a different scenario. So whilst the individual data series may not currently be at the most favourable levels, the wider framework suggests an easing in monetary policy was appropriate. This is an interim step to taking on board some of the changes suggested by former US Federal Reserve Chair Ben Bernanke in his review of MPC forecasting.
    
3. The Bank also published its August Monetary Policy Report in which it details its central projection alongside alternative projections. GDP is estimated to have increased by 0.7% in the first quarter of 2024 according to the ONS, and in the Bank’s central projection supply and demand are now broadly in line. The Bank expects the economy to grow by 0.8% in 2025, and 1.4% in 2026, however due to the restrictive nature of monetary policy demand will lag behind supply, and an amount of spare capacity will emerge in the economy from next year.
    
4. Labour market conditions continued to soften with the unemployment rate at 4.4% in March to May 2024, unchanged from February to April. Wage growth has also dropped, with total annual pay growing by 5.7% in May, down from 5.9% in April. Job vacancies also fell for the 24^th consecutive period in April to June to 889,000. The restrictive nature of monetary policy is expected to see the labour market soften over the next two years, with the unemployment rate rising to 4.6% in 2025 and 4.8% in 2026.
    
5. CPI inflation fell to 2.0% in the 12 months to May and was unchanged in June. Core CPI also remained unchanged at 3.5% and the closely watched services inflation was also unchanged at the elevated level of 5.7%. The Bank expects CPI inflation to pick up to 2.75% this year and 2.40% next year, before falling below target to 1.70% in 2026. The Bank notes that if Bank Rate remained at 5.00% (rather than following market implied rates) CPI inflation would fall below target in 2025. This shows that, if all other variables remain as expected, further cuts to the Bank Rate are to be expected.
    
6. However the Governor warned that the Bank is cautious about cutting ‘too much too quickly.’ There are significant upside risks to inflation that could mean monetary policy remains higher for longer, which is illustrated in the Bank’s alternative scenario. These include inflationary expectations being more engrained in price and wage setting than expected, and the rate of unemployment at which inflation falls being higher than anticipated. Demand may also turn out to be stronger than expected which would also put upwards pressure on inflation. Markets are currently pricing in one further cut to the Bank Rate this year, and there is unlikely to be any more than this unless the data provides compelling evidence that higher inflation is behind us. A gradual, stepped reduction in Bank Rate therefore seems likely.

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