To the surprise of precisely no one, the Bank of England left interest rates on hold yet again today.
Like the May meeting, seven members of the Monetary Policy Committee (MPC) voted to leave interest rates on hold with two calling for a 25 basis point cut.
But economists were pleasantly surprised by the relatively dovish tone struck by the Bank despite the recent upside surprises to inflation.
Inflation and wage data has come in ahead of expectations over the past couple of months, indicating that domestic price pressures still remain elevated.
For example, figures released yesterday showed that services inflation only fell to 5.7 per cent in May. This is about twice the level consistent with inflation remaining at the two per cent target.
Rate-setters have not been able to discuss their perspectives on the economic outlook because of the election campaign and so markets were preparing for the MPC to insist on the need for (yet more) caution.
However, the minutes of the June meeting showed that “some” policymakers who backed a hold – probably three and likely including Andrew Bailey – are fairly relaxed about the recent upside surprises to inflation.
For these members, the stubbornness of services inflation “did not alter significantly the disinflationary trajectory that the economy was on”. As such, today’s decision was “finely balanced”.
These members pointed out that the strength in services inflation was likely a result of ‘regulated and indexed’ components, such as mobile phone and broadband bills. These tend to be changed annually, and so there’s less danger that it will cause persistent inflation.
April’s near 10 per cent increase in the minimum wage also likely contributed to the persistence of inflation. The MPC members noted the impact of the minimum wage was “unlikely to be as large in future”.
If these ‘dovish holders’ moved to a cut in August, then there would be a majority for reducing rates.
Markets drew the obvious conclusion, with the FTSE 100 rising shortly after the decision while the pound fell against the dollar. Economists also viewed the decision as a dovish one.
“Today’s minutes cut the hurdle to an August rate cut. Services inflation and wage growth no further above the MPC’s forecasts than now could seal the deal,” Rob Wood, chief UK economist at Pantheon Macroeconomics said.
Peter Arnold, EY UK chief economist, jumped to a similar conclusion. “The MPC sent a clear signal that August’s meeting is live, and that a rate cut is on the cards if data published over the next six weeks is supportive,” he said.
In other words, it depends on the data (when does it not…)
But there is another big unknown. This was Ben Broadbent’s last meeting at the MPC and many analysts suggested he was among the more ‘dovish holders’.
He will be replaced by Claire Lombardelli. A few months ago, Lombardelli was sounding fairly hawkish on the inflation outlook.
We haven’t heard anything about what she thinks about the latest inflationary developments, so its difficult to draw conclusions. But her vote could well be the deciding factor when the MPC next meets on 1 August.