It was a pretty close one for the Bank of England (BOE), as policymakers voted 5-4 in favor of cutting interest rates by 0.25% from 5.25% to 5.00% in their August meeting.
In their monetary policy statement, BOE officials mentioned that weaker wage growth and slowing services inflation are expected to carry over to lower price pressures down the line. On top of that, they also noted that “a margin of slack should emerge in the economy as GDP falls below potential and the labour market eases further.”
Link to official BOE August Monetary Policy Statement
On a less downbeat note, policymakers also pointed out that a “stronger-than-expected path for demand” and “a higher equilibrium rate of unemployment” could translate to elevated inflationary pressures in the medium-term.
Meanwhile, the minutes of the meeting revealed that four MPC members (Megan Greene, Jonathan Haskel, Catherine Mann and Huw Pill) voted to keep rates on hold for the time being, highlighting the potentially greater impact of services inflation upsides on domestic price levels.
In their quarterly Monetary Policy Report, projected stronger services inflation of 5.5% year-on-year in September 2024 versus the earlier forecast of 4.7% in the May Monetary Policy Report.
Link to BOE August Monetary Policy Report
During the press conference, BOE Governor Andrew Bailey cautioned against pricing in consecutive interest rate cuts – a view echoed by Chief Economist Pill, who also said that they expect bumps on the inflation road ahead.
Link to Bank of England August press conference
Market Reaction
British Pound vs. Major Currencies: 5-min
Overlay of GBP vs. Major Currencies Chart by TradingView
Sterling had a bit of a rally-and-reverse movement going on ahead of the actual BOE decision, as traders knew that the announcement could go either way.
When the central bank announced its “finely balanced” decision to cut rates, GBP pairs had an initially bearish reaction, except against the Japanese yen which still seems to have a mind of its own, before pulling higher during Bailey’s presser.
The BOE Governor’s clarification that they are not pre-committing to successive easing moves likely lifted some pressure of the pound, as September rate cut odds turned lower after the event. The U.K. currency ended higher versus the lower-yielding yen, franc, and dollar while losing a bit of ground to the Aussie and Kiwi.