- The Bank of England kept rates on hold in a 7-2 vote split, as widely expected.
- The economy is slowing, the labour market is cooling and, so far, inflation worries have not materialised.
- We expect an unchanged Bank Rate for the coming year, with risks tilted towards a hike this year and potential for lower rates opening up in 2027.
The Bank of England (BoE) kept Bank Rate unchanged at 3.75% as widely expected. The decision was taken with a 7-2 vote, with Pill and now also Greene voting for a hike to “insure against the possibility of larger second-round effects”. Mann, although not voting for hike, was singled out with more inflation worries than the rest of the hold camp. Convinced, “a forceful Bank Rate decision can have a quick effect on inflation and inflation expectations”, she stuck with a hold decision. The deciding vote is often Governor Bailey’s and as he puts it, he is “content at the present time with holding“.
Fresh inflation and labour market data were released just ahead of the meeting. The fear of energy prices spreading to core inflation still has not materialised as core inflation only edged slightly higher to 2.6% in May, below expectations. Food inflation has been mentioned as a key focus point for spillover effects and there were no signs of that with food inflation declining to 2.1% from 2.9% in April.
The labour market remains on a cooling trend, although the April/May report was a bit stronger than expected. On the one hand, employment growth was higher and the unemployment rate was lower than expected. Public sector wage growth also increased, which reflects previous uplifts for NHS Staff, as the BoE notes it. On the other hand, the number of vacancies has declined, and private sector wage growth continues to move lower, now at levels consistent with the inflation target. April GDP data suggests, growth was back in negative following a few solid months, and largely, the data released since the previous BoE meeting has been on the soft side. The BoE continues to see the loosening labour market and weakening economy containing inflationary pressures.
BoE call. The meeting today has not changed our view that the most likely outcome is an unchanged Bank Rate for the coming year. Although, core PPI inflation remains quite modest, risks to the inflation outlook remains to the upside given businesses’ intention to increase prices quite steeply according to the PMI survey. An uncomfortable period with elevated inflation also lies ahead due to increased energy price caps. The slowing economy, cooling labour market and now also lower oil prices suggest that core price pressures will not increase more than what the BoE will accept, though.
Market reaction. The market reaction was muted and investors price in a full rate hike by the end of the year. A relatively weak UK growth outlook and our dovish stance on BoE compared to market pricing weighs on our GBP call. We forecast EUR/GBP to move higher towards 0.89 on a 6-12-month horizon.
