BoE: too soon to cut rates

As expected , the BoE left the Bank Rate unchanged at 5.25%. The voting split remained at 7 to 2, with Swati Dhingra and Dave Ramsden vot ing for a rate cut . BoE Governor Andrew Bailey said that it was “good news” that inflation eased to 2% but that was too soon to change interest rates. The MPC members want to be sure that inflation will remain low , and Mr Bailey point ed to a range of views with respect to risks of inflation persistence . For a majority of MPC members, high services inflation and stronger than predicted wage growth reinforced their view that it was too early to reduce interest rates. Services inflation fell to 5.7% less than the 5.3% expected in May. While the labour market has somewhat softened it remains strong by historical standards , with the increase in the National Living Wage probably having a “ greater than expected impact ” on overall wage dynamics . In the three months to April , pay growth continued to expand at the same pace as a month earlier (with regular and total earnings rising by 6% and 5.9% respectively). The vacancies continued to fall in May but remained 10% above pre-Covid levels, and the pace of decline slowed compared to last year. Overall, second-round effects could keep lasting upward pressure on underlying inflation. Meanwhile, the decision to maintain interest rates on hold ha s been “finely balanced” for some other MPC members, suggest ing that the BoE is moving closer to cutting interest rates. For those members, the impact of a higher National Living Wage o n aggregate earnings growth was unlikely to be as large in the future. The BoE continu es to expect inflation to rise above the target to around 2.5% in the second half of this year (due to the base effect of energy price declines ). At the same time, the MPC saw indicators of households’ inflation expectations to have further m oderate d close to around historical averages . With respect to growth, the MPC now expect s GDP growth of 0.5% in Q2 , notably stronger than the 0.2% rate in the May Report. T hus, a risk that spare capacity in the economy is likely to open has been lower than previously projected . The Minutes also point ed to stronger than expected h ousing investment in Q1 (+ 4.1% ) as being indicat ive of some easing in the impact of higher interest rates. We expect the BoE to move three times this year, by 25bps at each next meeting until November , as though inflation is set to reaccelerate to 2.5% and GDP growth is set to be stronger now in H2 , CPI inflation will drop somewhat below the B oE’ s target in two years’ time’ and particularly in three years along with the emergence of economic slack .