It was a close call for the Bank of England, with policymakers voting 5-4 to cut interest rates by 0.25% from 5.25% to 5.00% at their August meeting.
In their monetary policy statement, Bank of England officials said that weak wage growth and slower service sector inflation were expected to lead to lower price pressures going forward. They also noted that “marginal recession is expected to emerge in the economy as GDP falls below potential and the labour market slows further.”
Link to the Bank of England’s official monetary policy statement for August
Less pessimistically, policymakers also noted that “the stronger-than-expected path of demand” and “the higher equilibrium unemployment rate” could translate into higher inflationary pressures over the medium term.
Meanwhile, minutes of the meeting revealed that four MPC members (Megan Green, Jonathan Haskel, Catherine Mann and Hugh Bell) voted to keep interest rates unchanged for now, highlighting the potential greater impact of higher services inflation on domestic price levels.
In their quarterly monetary policy report, they forecast service sector inflation to rise to 5.5% year-on-year in September 2024, compared to the previous forecast of 4.7% in the May monetary policy report.
Link to the Bank of England Monetary Policy Report for August
During the press conference, Bank of England Governor Andrew Bailey warned against pricing in successive interest rate cuts – a view echoed by Chief Economist Bell, who also said they expected bumps in the road to inflation in the future.
Bank of England August press conference link
Market reaction
GBP/USD: 5 minutes
GBP/USD Overlay Chart by TradingView
The pound saw a slight up and down movement ahead of the actual BoE decision, as traders knew the announcement could go either way.
When the central bank announced its “delicately balanced” decision to cut interest rates, GBP/JPY pairs initially reacted bearishly, except against the Japanese yen which still seems to have a mind of its own, before rallying during Belize’s press conference.
The BoE governor’s clarification that they were not committed to successive easing steps is likely to have eased some pressure on the pound, as the likelihood of a September rate cut has fallen after the event. Sterling ended the day higher against the yen, franc and dollar, while losing ground against the Australian and New Zealand dollars.