MPC Meeting: Rate cuts on the horizon – every meeting now live

The Monetary Policy Committee (MPC) took another step towards rate cuts today with two members voting for a cut. What’s more, the minutes included new guidance that 'the risks from inflation persistence were receding' and a lower inflation forecast. This lays the groundwork for the first rate cut to come in June, which we then think will be followed by two more cuts leaving interest rates at 4.5% by the end of the year.

A dovish hold

As expected the MPC left bank rate unchanged at 5.25% today. But this was a dovish hold for three reasons. First, Deputy Governor Dave Ramsden joined Swati Dhingra in seeking a reduction in rates making it 7-2.

Second, the committee reiterated its guidance that 'policy could remain restrictive even if Bank Rate were to be reduced.' And it added that it will watch the 'forthcoming data releases and how these informed the assessment that the risks from inflation persistence were receding.' We interpret this to mean that as long as there are no big upside surprises in the next few data releases, a rate cut will come sooner rather than later.

Third, the Bank significantly reduced its inflation forecast. If interest rates follow the path that financial markets are now pricing in, inflation would be just 1.6% by the end of 2026 compared to a forecast of 2% made in March. This is a clear message to financial markets that they have gone too far in pricing in fewer rate cuts.

While the concerns raised by the more hawkish members of the committee, namely that the labour market is too tight and wage inflation is too high for services inflation to fall sustainably, are valid right now, it is just a matter of time before enough evidence becomes available. The labour market is easing and wage growth will slow sharply in the first half of this year. That would set the stage for the majority of the committee to become comfortable with rate cuts by June.

Where next?

The big question now is when, not if.

The MPC expects inflation to fall to 1.30% in two years' time if Bank Rate stays at 5.25% indefinitely. These forecasts strongly imply at least two rate cuts this year, and perhaps three. Put another way, the MPC thinks one more rate cut than the market prices is required in the next year, and probably four more than the market expects are needed by the middle of 2026.

Admittedly, the new guidance fell short of a commitment to a cut in June, however. Among the majority of MPC members voting to keep rates on hold, 'there was also a range of views about the extent of the evidence that was likely to be needed to warrant a change in Bank Rate, and the degree to which these members anticipated that incremental information in forthcoming data outturns would lead them to update materially their assessment of inflation persistence.'

However, Governor Andrew Bailey struck a dovish tone in the press conference. He indicated that June is a live meeting and flagged, with unusual bluntness, that rates would be cut by more than markets expect over the coming quarters if the MPC’s forecasts prove accurate.

The committee will receive a significant amount of information between now and its next decision, due to be published on June 20.

It will have two more months of CPI data that are likely to show inflation has fallen back to 2%. A lot of that move will be the result of the big fall in energy prices in April. Policymakers will be focused on core inflation and will want confirmation that the large rise in services and core goods prices in 2023 hasn’t been repeated.

It will also have the official average weekly earnings data for April available, which will show the impact of the near 10% rise in the National Living Wage on the pay distribution. We don’t expect the data to alarm the committee.

The upshot is that the Bank is clearly on its way to rate cuts, we think the change in guidance and forecasts is laying the groundwork for the first rate cut to come in June. At the very least, every meeting from now on should be considered live.

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