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Base rate cut not expected until late summer

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  • 17/06/2024
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Base rate cut not expected until late summer
Interest rates are set to remain at 5.25% for the seventh consecutive month when the Bank of England meets to decide on the direction of the base rate later this week.

Despite predictions that inflation will fall to the bank’s target of 2% from its current position of 2.3% to be revealed a day before the base rate decision on 20 June, rate-setters are expected to hold fast.

At May’s meeting of the Monetary Policy Committee (MPC), two of the nine members voted to reduce the base rate – the interest rate that influences the cost of borrowing and how much we earn on our savings – to 5%. At the time, Governor Andrew Bailey left open the possibility of a rate cut in June, saying: “A change in bank rate in June is neither ruled out nor fait accompli”.

However, financial analysts think a June interest rate cut is no longer on the cards.

The bank did confirm that the economic data would dictate when it would start to cut rates and, according to economist Capital Economics, “the tone of the incoming data since then [has] been disappointing”.

Although the Consumer Prices Index (CPI), which is the overall measure of inflation, is expected to fall back to the Bank of England’s target of 2%, service inflation – which measures the cost of services such as holidays, eating out and entertainment – remains around 6%.

 

Wage inflation remains high

Meanwhile, upcoming wage data is creating concerns. The Office for National Statistics (ONS) reported wage inflation of 6% in the three months to April, which remains high. At the same time, more people are dropping out of the labour market.

“Barring a dramatic weakening in May’s inflation data [on] Wednesday, which the MPC will see in advance, we think the committee will vote decisively by 7-2 in favour of leaving bank rate at 5.25%,” said Ruth Gregory, deputy chief economist for Capital Economics.

Capital Economics expects to see the first base rate cut in August.

Thomas Watts, investment analyst at abrdn Portfolio Solution, said some financial markets are predicting there will not be a base rate cut until summer, which he said will leave investors looking to the bank for hints on when this will come.

“However, unlike May’s press briefing, June’s decision will just be accompanied by a brief statement rather than the full monetary policy report and press briefing.

“So, if there is no change to interest rates this week, there would be little guidance on when this is likely to happen. Last month, seven members of the Monetary Policy Committee voted to hold, while two voted for a cut. It’s likely that more of the MPC could join the cut cohort, but probably not enough to force a decision just yet,” he added.

 

Base rate cut in August ‘most likely scenario’

Steve Matthews, investment director of liquidity at Canada Life Asset Management, predicts another 7-2 vote in favour of holding the base rate at 5.25% in this month’s MPC meeting.

He said: “Despite recent data supporting a cut – such as the unemployment rate rising to 4.4% and expectations that the CPI will hit 2% on Wednesday – concerns about upcoming wage data and services inflation persist.

“While the European Central Bank [ECB] made a move last week, the Federal Reserve is taking a more cautious approach. This gives the Bank of England additional opportunity to make a well-timed decision.

“Although there is light at the end of the tunnel, we are still firmly in the tunnel. We maintain our view that a first cut of 25 basis points in August is still the most likely scenario.”

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