The Bank of England is set to keep rates on hold next week, sticking with its gradual approach to cuts after a reduction in May, but investors will look for hints on whether a slowing economy and weaker wage growth could speed up the pace of easing.
"If the outcome of June's meeting is largely a foregone conclusion, the path of the market into the August forecast round comes down to the market's assessment of the risk around alterations to guidance," Moyeen Islam, fixed income strategist at Barclays, said in a note to clients this week.
So far, the central bank has taken what it calls a "gradual and careful" approach to cutting rates due to persistent inflation pressures and wage growth, only reducing rates four times, or every quarter, since August 2024.
But BoE policymakers became more divided in their decision making at the May meeting, tempering investor expectations of a faster pace of rate cuts before weaker domestic data revived bets that the central bank will keep up its a quarterly pace.
The Monetary Policy Committee voted 5-4 to reduce borrowing costs by 25 basis points to 4.25% from 4.5% in May in its first meeting since U.S. President Donald Trump announced wide-ranging tariffs on trade partners. Policymakers were split three ways in their decision making.
Two BoE's policymakers Swati Dhingra and Alan Taylor, voted for a bigger half-point cut, while another pair - chief economist Huw Pill and Catherine Mann - unexpectedly voted in May to hold rates at 4.5%. Some of the majority who voted for a cut also said they might not have done so had it not been for Trump's April 2 tariff announcements.
British regular and private sector wage growth cooled in April - though at over 5% it is well above levels the BoE is comfortable with - and the number of workers on company payrolls in May fell by the most in five years, while the jobless rate rose to its highest since 2021.
Britain's Office for National Statistics reported that consumer price inflation jumped to 3.5% in April from 2.6% in March - largely due to one-off effects. The ONS later said it had made an error and that the true CPI rate was 3.4%. Fresh CPI data is due the day before the BoE's decision.
Last month the BoE forecast CPI, on a quarterly basis, would peak at 3.5% in the third quarter of this year while the economy would grow a modest 1% in 2025.
WEAK GROWTH
Financial markets are currently pricing two more quarter-point rate cuts by the BoE, a projection that was seen as slightly less likely after Israel's large-scale military strike on Iran on Friday triggered a surge in oil prices.
The BoE has been much slower than the European Central Bank to cut rates. The ECB has chopped its benchmark rate by 2 percentage points since June 2024 - including a quarter-point cut last week after inflation returned to the central bank's 2% target.
The Federal Reserve cut rates three times last year, reducing borrowing costs by 1 percentage point, and investors expect a half-point more in cuts by the end of the year.
"Borrowing phrasing from the Fed and then the ECB last week too, policy seems to be in a good position, allowing the BoE to wait and see how economic conditions and the international political backdrop evolve," Investec economist Ellie Henderson said in a note to clients.
Output in April was hit by the end of a tax break on house purchases and the initial impact of Trump's tariffs. British goods exports to the United States dropped to their lowest in more than three years after a record 2 billion pounds ($2.71 billion) monthly fall.
While Britain is the only country to have agreed the outline of a deal with the U.S. that seeks to remove the extra levies on aluminium, steel, and cars, the deal has yet to be implemented and the 10% tariff remains for other goods.
In May, before the deal, the BoE estimated the impact of the tariffs would reduce British economic output by 0.3% in three years' time and push slightly down on inflation.
($1 = 0.7388 pounds)
