MNI: BOE MPC Cuts 25BP In May As Committee Splinters

The Bank of England Monetary Policy Committee delivered its expected 25 basis point cut at its May meeting, lowering the policy rate to 4.25%, but the committee splintered with a three-way vote on the decision.

Only five members of the nine strong MPC backed the 25 bps cut with two, external member Catherine Mann and Chief Economist Huw Pill, voting for no change in policy and two other externals, Swati Dhingra and Alan Taylor, voting for a 50 bp cut.

The MPC's guidance was that "a gradual and careful approach" to policy setting was appropriate, in line its previous guidance, but as all members signed up to it despite voting three different ways the lack of a clear steer from this wording is clear.

The five strong majority on the MPC took the view that the May decision would have been finely balanced between no change and a cut but that global trade developments, triggered by US tariff policy, justified a cut.

Mann and Pill noted the contribution to easing in financial conditions from the fall in short-end market interest rates, which had dropped some 40bp since the March meeting, the resilience in the labour market and firmer household inflation expectations. They concluded that Bank Rate should be held steady "to weigh against stubborn inflationary pressures."

DOWN TO TWO SCENARIOS

The MPC dropped its previous three economic scenarios in favour of just two, both of which had downside risks to growth but one had an upside, and the other a downside, inflation outlook.

The first scenario was based on modelling elevated uncertainty, with Bank economists having developed an integrated UK uncertainty index derived from nine different uncertainty measures, including sterling asset options volatility and trade uncertainty.

This measure showed a sharp rise in uncertainty in recent months in response to global trade frictions and this feeds through to lower demand, weaker growth and higher margin of economic slack and weaker inflation.

The second scenario envisaged the upcoming rise in headline inflation feeding through to second round effects in domestic wage and price setting amplified by weak productivity growth.

Neither scenario appears to entirely reflect the views of any individual MPC member but the do provide a reference point for them.

GROWTH LOWER, INFLATION RISES NEAR TERM

In the MPC's new central, baseline projection for CPI inflation was for it to rise to 3.5% in Q3 this year before falling steadily to hit the 2.0% target by Q1 2027 and to stay at 1.9% from Q2 2027 through to Q2 2028.

GDP growth was expected to be 1.0% in 2025 calendar rising to 1.5% in two years' time. Four quarter year-on-year growth was seen at 1.3% in Q2 2026 rising to 1.9% in three years' time.