Monetary Policy Committee preview: gradual cuts still the plan

It’s a sure bet that the Bank of England (BoE) will keep interest rates on hold at 4.25% next week, probably by a 7-2 vote with two members preferring to cut. We also expect the BoE to keep to its recent “gradual and careful” pace of quarterly cuts in the second half of the year. That means August for the next reduction and interest rates ending 2025 at 3.75%.

Recent data not enough to shift MPC in either direction

The bar for a consecutive rate cut in June was always quite high. After running through the data releases since the last Monetary Policy Committee (MPC) meeting in May, we don’t think there’s anything that would force the MPC off its quarterly rate-cutting path next week.

In Q1, the economy outperformed expectations with GDP growth coming in at 0.7% q/q. However, the 0.3% m/m contraction in April confirms that much of the initial strength was due to front-running of taxes and tariffs. Smoothing out the volatility around March and April, we estimate that underlying growth is around 0.1% m/m, slightly stronger than the MPC’s assumption of flatlining underlying growth.

What’s more, the labour market is clearly easing more quickly than expected. Payrolls fell by 109,000 in May. This is the highest figure since 2023 when compared to other first estimates. Private sector pay growth excluding bonuses also slowed to 5.1% in April from 5.5% in March. Admittedly, payroll numbers are often heavily revised and pay growth is still well above the 3% that is consistent with 2% inflation. However, pay growth is now likely to come in significantly below the MPC’s Q2 forecast of 5.2%, which will help to ease some concerns that sticky wage growth will keep inflation elevated.

Meanwhile, inflation matched the MPC’s forecast in April, once we account for the ONS error in vehicle excise duty.

All in, the recent data is pointing towards further rate cuts. But the data hasn’t been bad enough to worry the MPC into breaking its careful and cautious mantra and going for a consecutive rate cut next week. That means a pause outcome at next week’s meeting.

We expect the committee to be split along familiar lines: two members voting for consecutive cuts, but the majority of the committee voting to keep rates on hold.

We also aren’t expecting any significant change in the forward guidance outside of an acknowledgement of the weaker labour market.

August interest rate cut odds-on now

Looking further ahead, the deterioration in the labour market, weaker economic growth and inflation in line with the MPC forecast should give the MPC all the cover it needs to cut rates again in August, keeping on the quarterly cutting path.

However, if the economy shrugs off the impact of tariffs and the uncertainty associated with them continues to recede, then there is a good chance the committee will choose to skip a cut in the second half of the year. Indeed, with pay growth still elevated, inflation likely to be above the 2% target until 2027 and households’ inflation expectations rising, it probably wouldn’t take much to shift the MPC onto an even more gradual path.

For now, though, we are still comfortable with our view of two more rate cuts this year in August and November.

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