BoE poised to slash rates again but 'divided' MPC faces 'delicate balancing act

The MPC faces an unenviable dilemma. Data on the health of Britain’s economy has turned sour. GDP contracted on a monthly basis in both April (-0.3%) and May (-0.1%), the PMIs are consistent with stagnation and consumer spending is fragile. Arguably of even greater concern is the near-total capitulation in the jobs market. Unemployment has surprised to the upside relative to the bank’s forecasts (4.7%), vacancies have fallen and the number of employees on the payroll has declined in each of the past five months, with jobs being shed at the fastest pace since HMRC began collecting the data in 2014 (outside of the pandemic).

In and of itself, the performance of economic activity and the labour market would probably not only warrant an August rate cut, but the commencement of an aggressive pace of easing from there on out. Yet, the committee has a delicate balancing act on its hands, as it is grappling with both the prospect of weaker economic growth ahead and an increase in consumer price growth. UK inflation jumped to 3.6% in June, which is both the highest level since January 2024 and almost double the MPC’s 2% target.

The good news is that sunnier days lie ahead. The MPC’s latest CPI forecasts suggest that inflation will peak at 3.7% in September, before gradually declining towards the target in 2026.

The problem for the bank is that upside risks to prices remain prominent, notably originating from elevated wage pressures, high energy bills and rising food inflation, which is forecast to hit 6% by year-end. We then have the nagging issue of the government’s business tax raid, which we have long contested (rightly so it seems) would both damage employment and raise inflation, as firms pass the increase in costs onto consumers through higher prices. These conflicting risks mean that the vote on rates will almost certainly be split on Thursday.

 These conflicting risks mean that the vote on rates will almost certainly be split on Thursday. It will be the usual suspects again that are effectively guaranteed to vote in favour of a cut. Members Dhingra, Ramsden and Taylor all dissented in favour of a cut in June, and there is nothing in the data or their latest communications to suggest that they won’t do so again this week. We expect them to be joined by Governor Bailey and the two other deputy governors (Breeden and Lombardelli), who almost always vote as a collective.

We think that the reaction in sterling will depend on two things: the voting pattern among MPC members, and whether or not the BoE maintains its forward guidance. While we are bracing for a 7-2 split vote, we would not be overly surprised if Dhingra and/or Taylor voted for a 50bp cut, as they did in May. This, we believe, would likely trigger a sell-off in the pound this week, as would a ditching of its “gradual and careful” guidance, which we contend is rather unlikely.