Bank of England cut as expected, but not very dovish

The Bank of England (BoE) has been on a gradual rate cut path, and the 25bps rate cut was very widely expected. The data since the central bank last met (including that upside inflation surprise last month) wasn’t enough to change that.

With significant uncertainty around the outlook – domestically and abroad – and several plausible paths ahead, it is perhaps understandable that different MPC members ended up supporting different rate decisions.

Despite the cut, the decision wasn’t especially “dovish”: The Monetary Policy Committee (MPC) stuck to their “gradual and careful” language and four MPC members voted for unchanged rates (albeit one of them also voted for a 50bps rate cut). Of the four who voted for a 25bps rate cut, the minutes noted that some of them felt there was a risk that disinflation momentum could slow. With significant uncertainty around the outlook – domestically and abroad – and several plausible paths ahead, it is perhaps understandable that different MPC members ended up supporting different rate decisions. The Bank of England’s MPC does not focus on coming to a consensus in the same way as some other central banks do. One member, Alan Taylor, initially favoured a 50bps cut but ultimately supported a 25bps cut when the option narrowed to either cutting 25bps or keeping rates on hold.

Key language a little changed: The BoE remains in a rate cutting stance (“a gradual and careful approach to the further withdrawal of monetary policy restraint remained appropriate.”) Again, policy is “not on a pre-set path”. However, they now note that, “the restrictiveness of monetary policy had fallen as Bank Rate had been reduced” and specifically that “the timing and pace of future reductions in the restrictiveness of policy would depend on the extent to which underlying disinflationary pressures would continue to ease”.

Central forecast – higher for inflation and similar for growth: Using a market profile for interest rates that sees rate cuts down to 3.5% in 2026 (from 4.00% today), the BoE’s central GDP growth forecast shows growth rising in coming years (though not fast growth), with 1.5% GDP growth two years ahead. The bank’s central CPI inflation forecast is at 2.0% in two and three years’ time, but with the forecast path revised a bit higher (including a near-term peak around 4% and one-year ahead inflation of 2.7% inflation, rather than 2.4% previously). Crudely, that suggests a central case where rates are gradually cut to 3.5% still isn’t far off the mark in terms of what it had envisaged at this point. But given the more scenario-based approach now, I am not inclined to take a strong message from the bank’s central forecast. In the press conference, Deputy Governor Clare Lombardelli pointed out that the bank has moved away from the forecast being central to their process. More important, perhaps, was the comment from the minutes that, “overall, the MPC judged that the upside risks around medium-term inflationary pressures had moved slightly higher since May”. Governor Andrew Bailey suggested in the press conference that the inflation persistence scenario has come into greater focus.  

Inflation persistence vs weak demand: The BoE remains worried about inflation persistence while also regarding UK economic activity as “subdued”. There were similar comments on activity to its last meeting (though perhaps less strong), “the labour market was continuing to gradually loosen” and, “a margin of spare capacity was estimated to have opened up”. During his opening comments, Bailey also said that “there are slightly more downside risks to activity”. However, MPC members varied in their confidence that slower wage growth would feed into lower services inflation and around how much slack had built, as well as on the path ahead for slack. They worry for example that increases in food and energy price inflation may raise inflation expectations.

A more uncertain path for policy: The Governor commented that he still felt the direction of the rate path was downward but said that the path has become more uncertain. He said he has not changed his view on the overall direction, but suggested that there was question over what course or period of time it takes.

Rate path expectations: My central case pencils in one more rate cut from the Bank of England this year, i.e. it sees the Bank continuing a gradual path with the next rate cut in November rather than sooner (or later). I have forecast a 3.00% terminal rate. With so much uncertainty around the economic outlook, there remain significant risks to that central case. For more on the UK outlook, refer to the related content section.

MPC central forecast from the August Monetary Policy Report

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