BoE 25bp cut in August 'highly likely' but inflation fears will ensure 'gradual pace' of future cuts

Sterling continued to lag behind most of its major counterparts last week, as another batch of underwhelming economic data ramped up fears over the health of Britain’s economy.

The June retail sales figures and July business activity composite PMI all surprised to the downside, and remained consistent with an economy that is stuck squarely in stagnation.

News that the UK government borrowed more than expected in June will also do nothing to ease pressure on Chancellor Rachel Reeves, who will almost certainly need to raise taxes again in the autumn in order to avoid a fiscal catastrophe.

The rapid deterioration in the economy puts the Bank of England in a quandary, and begs the question as to whether the MPC will prioritise propping up growth and the jobs market, or maintaining price stability.

While we think that a 25 basis points rate cut remains highly likely in August, fears over the latter could ensure no more than a gradual pace of rate reductions beyond then.