Forthcoming Bank of England base rate

Commenting on the forthcoming Bank of England (BoE) base rate update on 1st August, Chris Arcari, Head of Capital Markets, says:

“The decision on whether to begin cutting rates at the Bank of England’s Monetary Policy Committee meeting on Thursday looks finely balanced.

“While headline inflation has been at the BoE’s 2% target in May and June, energy prices mean it is likely to rise in the second half of the year and is forecast to reach close to 3% by the end of 2024. Furthermore, recent data on GDP growth, services inflation, and wage growth have all exceeded the Bank of England’s forecasts recently, which, all else equal, weighs against the BoE cutting rates.

“Nonetheless, lowering rates need not mean adopting a stimulative stance – given falls in inflation, monetary policy has continued to tighten through 2024 via rising real rates, despite the last rate rise coming in August last year. Put another way, higher than expected, yet easing, underlying inflation pressures can be seen to be consistent with a gradual reduction in interest rates to slightly less restrictive levels over time.

“As of close of business on 26 July, markets were pricing in the best part of two 0.25% pa interest rate cuts in 2024 and were leaning towards the first cut coming in September, rather than this week. Whether the BoE cuts rates in August or September, we think that the key point is that the pace of rate cuts is likely to be very gradual given the current decent growth backdrop and stickiness in underlying measures of inflation.”