City split on Bank of England’s August interest rate decision
City economists are split about whether the Bank of England will choose to start cutting interest rates on Thursday.
The Bank Rate has stood at 5.25 per cent since last August, but rate-setters have been edging closer and closer to cutting rates over the past few months as inflation has come back under control.
Two members of the Monetary Policy Committee (MPC), Swati Dhingra and Dave Ramsden, have already backed calls for a rate reduction. While seven members voted to leave rates on hold in June, minutes from the meeting showed that the decision was “finely balanced” for a handful of MPC members.
Incoming data since the June meeting has not provided a compelling case either way. Moreover, the swing voters on the MPC have not spoken since the general election, making it unclear where they stand.
“The August decision is, perhaps, one of the toughest MPC decisions to forecast…in recent memory,” Michael Brown, senior research strategist at Pepperstone said. Markets put the odds of a rate cut at around 40 per cent.
While the headline rate of inflation is back at two per cent, measures of underlying inflationary pressure remain stubbornly high.
Services inflation, a good gauge of domestic price dynamics, remained stuck at 5.7 per cent in June and has not made significant progress since February. Wage growth too is running too hot for rate-setters to be confident that inflation is returning to target sustainably.
However, unemployment has increased significantly since the end of last year which should help to ease wage pressure while forward looking surveys suggest services firms will not be able to increase prices much in the months ahead.
Deutsche Bank, Goldman Sachs and Nomura were among the forecasters backing an August cut.
“The Bank of England faces a tough decision,” analysts at Nomura noted. “But we think it will deliver the first cut of the cycle”.
Sanjay Raja, chief UK economist at Deutsche Bank, agreed that it was a “close call,” but he expected the the Bank to put “stronger reliance on its inflation projections” as well as forward-looking indicators which point to easing price pressures.
However, Capital Economics and Pantheon Macroeconomics both thought that the Bank of England would wait one more meeting before starting to cut rates.
“The economy’s recent strength and the stickiness of services inflation leads us to think that the Bank of England will wait until its September meeting to cut interest rate,” Ruth Gregoy, deputy chief UK economist at Capital Economics said.