To cut or not: a close call for the BoE next week

Three independent external MPC members - Megan Greene, Jonathan Haskel and Cathy Mann – will certainly vote against cutting interest rates on August 1 st . Also, Chief Economist Huw Pill appeared to be concerned over inflation persistence, suggesting that he would likely refrain from voting for a cut. This implies that the remaining MPC members would all need to vote in favor of a rate cut, making the decision a very close call . We view the likelihood of a rate cut in August to be somewhat higher than in June, as there are signs of softening costs in the service sector and a cooling labour market. Also, we believe, as Governor Andrew Bailey pointed out few weeks ago, that one 25bp reduction would keep monetary policy tight. Meanwhile, a cut in interest rates would bring some relief to households set to face a significant increase in mortgage costs. Overall, we expect two rate cuts this year , one in August and furthermore in November. Should the BoE decide not to cut in August, the Bank Rate will be reduced only once in November. Also, if the BoE cuts in August in line with our forecast , the Bank w ill still stress that the next move can be in either direction.