BoE: as expected a narrow vote to cut rates

BoE policymakers voted 5-4 to cut the Bank Rate by 25bps to 5.00% in line with our projections and Reuters consensus (after the voting split of 7-2 in June) . This is the first rate cut after the hiking cycle that begun in Dec ember 2021 (+515 bps) . BoE governor Andrew Bailey said that “ i nflationary pressures have eas ed enough , yet he cautioned about cutting interest rates “too quickly or by too much” , suggesting that the MPC will move carefully going forward . The degree of monetary policy restrictiveness will be decided at each meeting, suggesting meeting-by-meeting approach. Among the policymakers the Governor Andrew Bailey, Sarah Breeden, Swati Dhingra, Clare Lombardelli and Dave Ramsden voted to cut rates by 25bps in a finely balanced decision . As expected, (see our Preview) , the external policymakers Megan Greene, Jonathan Haskel and Catherine Man n together with the BoE Chief economist Huw Pill voted to maintain interest rates unchanged. The BoE expects headline inflation to edge higher to 2.75% in Q4 2024 as the base effects of last year’s energy price falls fade but then to gradually drop below the 2% target in 2026. While services inflation was ab ove the BoE’s forecast in June, the BoE associated that to “volatile components” and regulated prices. At the same time, the BoE sees the economy to grow by around 1.25% this year (compared to its previous forecast of just +0.5%), but to slow to 1% next year (unchanged) . The unemployment rate will increase further , rising above the medium-term equilibrium rate of around 4.5% by the middle of next year amid tight monetary policy stance. At the same time , the BoE will remain “highly alert” pointing to risks of inflation pressures proving more persistent given remaining “some upside risks to the outlook”. As the voting split shows the MPC is divided between those who saw inflation pressures moderating and those who were further concerned about inflation persistence. The four “hawkish” members saw the underlying domestic inflationary pressures appearing more entrenched and second-round effects having a larger impact on wages and prices. We expect that the BoE will cut again in November thanks to signs of easing pay growth and slowing service inflation. While headline inflation is still forecast to hover above the BoE’s 2% target, the BoE will cut four more times next year.