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Markets were initially confident that the Bank of England (BoE) would cut interest rates in August, with previous hints from the Bank suggesting a potential reduction. However, recent inflation data has tempered these expectations, leading to a reassessment of the likelihood of a rate cut.
Interest rates have been maintained at a 16-year high of 5.25% in an effort to curb rising consumer prices. Despite these efforts, the cost of borrowing, including mortgages, has surged.
Inflation reached the BoE’s 2% target in May, leading many to anticipate a rate cut during the summer. However, with inflation holding steady at 2% in June—contrary to predictions of a further decline—investors have scaled back their expectations for an August rate cut. Money markets now reflect a less than 25% chance of a rate reduction next month.
Traders have significantly revised their forecasts, with the probability of a rate cut falling from about 51% at the end of last week to approximately 49% on Tuesday. This shift in expectations has been bolstered by comments from BoE’s Jonathan Haskel, who expressed concerns about inflation surpassing the 2% target.
“I would rather hold rates until there is more certainty that underlying inflationary pressures have subsided sustainably,” Haskel stated in a speech at King’s College London. As an external member of the Monetary Policy Committee (MPC), Haskel has consistently advocated for maintaining rates amid ongoing inflationary pressures.
Haskel’s tenure is set to conclude on August 31, but his stance reflects a broader sentiment within the BoE. Despite calls from some MPC members for a reduction in borrowing costs, Haskel and others have emphasized the need for more stable inflation before making any cuts.
Services inflation, which includes categories such as hospitality and housing, remained unchanged at 5.7% in June, exceeding economists’ expectations. Additionally, the core inflation rate, excluding volatile items like energy and food, held steady at 3.5%.
Peter Arnold, EY UK’s chief economist, noted that the MPC remains divided. “The minutes of last month’s MPC meeting made it clear that the committee is split. The more hawkish members may view the current data as evidence that their concerns about persistent inflation are justified,” Arnold said.
BoE Governor Andrew Bailey has previously stressed that any decision to cut rates will be contingent upon sustained progress towards the inflation target. With inflation remaining firm, a rate cut this summer appears increasingly unlikely, pending further data and consensus within the MPC.
