UK and US rate decisions: kept on hold, for now

BoE on hold, but three vote for a cut

The Bank of England (BoE), as expected, kept rates on hold, with the vote at 6-3. Dhingra, Ramsden and Taylor all voted for a 25bps rate cut. Governor Bailey said rates “remain on a gradual downward path”. I have been expecting them to next cut rates in August and the tone of the minutes and the results of the vote keep that on track.

I have been expecting the BoE to next cut rates in August and the tone of the minutes and the results of the vote keep that on track.

All members “stressed that monetary policy was not on a pre-set path”, but they continue to see a “gradual and careful approach to the further withdrawal of monetary policy restraint” as appropriate.

The tone when talking about developments in the economy was consistent with them cutting further: “the labour market had continued to loosen” and “there was clearer evidence that a margin of slack had opened up over time in the labour market”, “measures of pay growth continued to moderate”. They remain vigilant about the extent to which slower pay growth would feed through to consumer price inflation, however. Even though they raised their estimate of Q2 GDP a little, their agents also suggested that UK business confidence continues to wane.

For now, they still think policy settings need to be restrictive: “more pronounced disinflation was needed to ensure CPI inflation declined back towards the 2% target... the Committee had retained a restrictive stance in order to continue to squeeze out persistent inflationary pressures”. However, they disagree on how restrictive current monetary policy settings actually are.

However, those who voted to keep rates on hold said they saw no “strong case” for easing now and said that “assessing the pace of disinflation would be key…in reaching a view on how quickly to remove remaining policy restraint”. That assessment sounds like it will include labour market slack, productivity growth and signs of inflation persistence for example. CPI and labour market data will, as ever, remain important to watch over the next month or so.

US Monetary Policy: FOMC participants still have two cuts this year in their (median) forecast, but lack conviction

As expected, the US Federal Reserve kept monetary policy unchanged, with the target rate remaining 4.25% to 4.50%. Chair Jerome Powell said that they were waiting for more evidence on tariffs. Federal Open Market Committee (FOMC) participants still pencil in two rate cuts this year, but with the forecasts showing fewer cuts than before in 2026 and 2027.

Against a backdrop of elevated uncertainty (albeit they feel uncertainty has diminished), Powell emphasised that no-one holds these rate path forecasts with a great deal of conviction. Again, for now, the economy is in a reasonably good place in their view – and policy is (only) modestly restrictive – which means that they can take some time to learn more about tariffs and their impact and ultimately make a better decision: “We feel like we’re going to learn a great deal more over the summer about tariffs”. In short, they are still in wait-and-see mode for now.

At the moment the risk feels skewed towards fewer rather than more cuts.

I have been pencilling in two rate cuts later this year in my forecast, which remains a plausible forecast given the FOMC projections, but does depend on seeing more signs of labour market cooling and US economic growth slowing, and a contained impact on inflation from tariffs. At the moment the risk feels skewed towards fewer rather than more cuts. However, as Powell points out, we will get more evidence on tariffs and their pass-through in coming months.

Changing forecasts: The changes in median rate projections – fewer rate cuts over 2026 and 2027 – presumably reflects that although the FOMC’s growth and unemployment forecasts have worsened a little, participants have also raised their inflation forecasts (looking at the median). Estimates of the long-run Fed Funds rate (which I would take as a proxy for a medium to longer run neutral rate) haven’t changed, with the median remaining at 3%.

Lack of conviction should lessen: Chair Powell pointed out at one stage that he thought you could make a good case for any of the rate paths in the projections (there are now seven on the FOMC who forecast no cuts this year for example and two with more than two cuts). However, he made the point that they will learn a great deal more on tariffs, pass-through and the impact on the broader economy “over coming months”. As they get more evidence, he’d expect the gap between participants to lessen.

A nod to events in the Middle East: He was asked about events in Iran-Israel and said it was possible to see higher energy prices – that there may be a spike but that those tend to come down quite quickly. He acknowledged that didn’t happen in the 1970s but said that the US had since become a lot less dependent on foreign oil.

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