MNI BOE WATCH: MPC Cuts Policy Rate, But Two Back Hold

The Bank of England delivered the expected 25-basis-point cut in May, taking Bank Rate to 4.25%, but the Monetary Policy Committee splintered three-ways with the vote more fractured and hawkish than analysts had predicted.

Only five of nine members backed the 25bp reduction, with two, Chief Economist Huw Pill and external member Cathy Mann, both voting for unchanged policy, and external members Swati Dhingra and Alan Taylor in favour of a 50bp cut. Analysts had expected a decisive majority for a 25bp cut, with an eight-one or seven-two vote in favour, with dissents only for a 50bp cut.

Until the decision, debate among analysts had centred on whether there would be back-to-back cuts, with the policy rate lowered again in June, but the minutes seemed to weigh against this.

These stated that most of the five members who voted for a 25-basis point cut had judged that it would be a "finely balanced" decision between no change and a cut until recent global developments around trade barriers. BOE Governor Andrew Bailey, speaking at the press conference following the decision, placed himself in this camp. (See MNI INTERVIEW: Financial Conditions Back BOE Easing - Aikman)

SCENARIO SHIFT

The MPC's previous three economic scenarios were scrapped and replaced with two, both of which factored in trade disruption. In one, heightened uncertainty, measured using an integrated UK uncertainty index, was seen leading to further weakening of growth, hitting household consumption and lowering investment and ultimately curbing inflation.

In the second scenario, more persistent pressures from domestic wage and price setting, with weaker supply and a rise in inflation expectations, were seen as posing a greater risk of feeding through to more elevated inflation down the line.

Deputy Governor Dave Ramsden told the press conference that MPC members might identify with part of one scenario and part of another, which suggests the two scenarios will not be a central communication tool for members identifying their own policy stances going forward.

The new economic forecasts showed that the Bank actually revised up its 2025 GDP forecast,  from 0.7 to 1.1%, but this largely reflected a strong Q1. The MPC judged that risks around its growth forecasts were "somewhat to the downside" while inflation risks were two-sided, with inflation on the CPI measure show peaking at 3.5% in Q3 this year before falling back to the 2.0% target in Q1 2027 and then holding steady at 1.0% from Q2 2027 until the end of the three-year forecast.