This was a dovish move from the Bank of England, make no mistake about it.
The Monetary Policy Committee (MPC) voted to leave interest rates at 5.25 per cent, but an extra member of the MPC, Dave Ramsden, joined Swati Dhingra in voting for an immediate 25 basis point rate reduction.
Looking at the vote split, the minutes from the meeting and the Governor’s comments after the meeting, summer rate cuts – whether it be June or August – look a virtual certainty.
Indeed, in his comments to the press after the decision, Andrew Bailey, Governor of the Bank of England, said markets were underestimating the extent to which interest rates might be cut.
“Its likely that we will need to cut Bank Rate over the coming quarters…possibly more so than currently priced into market rates,” he said.
Markets were previously pricing in only two rate cuts, with August seen as the likely start date.
The shift in markets following the decision was not massive, but it was meaningful. Traders now put the odds of a June rate cut at 50-50.
That seems about right, given the MPC’s comments. Bailey stressed again and again – not unreasonably, it has to be said – that future decisions on interest rates would depend on how the data came in.
“Before our next meeting in June, we will have two full sets of data for inflation activity and the labour market and that will help us in making that judgement afresh…Let me be clear, a change in Bank Rate in June is neither ruled out nor a fait accompli.”
This, of course, leaves open the question of what data would justify a June cut.
The Bank of England’s forecasts suggest that headline inflation will fall to around two per cent when April’s figures are released in a couple of weeks. Services inflation and wage growth, both of which remain around six per cent, will ease more slowly but ease nevertheless.
The MPC will be paying very close attention to wages and prices in the services sector to assess the underlying inflationary pressures.
“More data will help us to extract the signal from the noise and help us to judge whether or not we are on track to bring inflation back to the two per cent target sustainably,” he said.
Whether these figures will be enough to tip the balance to a June rate cut depends on how each individual member of the MPC interprets them. There are deep divisions about this, as the minutes note.
“There was 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.”
The Bank has opened the door to a June rate cut. Now we just have to wait for the data.