Monetary Policy & Inflation | Rates | UK
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Summary
- The MPC voted for no change in bank rate (4.25%), as expected.
- Minimal statement changes included adding a clearer indication of ‘slack opening up’ in the UK economy.
- We still expect the BoE to cut again in August and cut to 3.5% this year.
Market Implications
- We remain long SFIZ6 in our model portfolio, targeting 97.0.
Little Surprise from BoE Decision
The MPC kept the bank rate at 4.25% (as long expected). The statement retained comments that the BoE would take a ‘gradual and careful approach’ and that they were not on a ‘pre-set path,’
Modest changes included:
- ‘…maintaining Bank Rate in restrictive territory so as to continue to squeeze out persistent inflationary pressures’ – changed to ‘squeeze out existing or emerging inflationary pressures.’
- I would read little into this, although it does align with my view the hawks are more concerned with risks than anything they see in the data.
- Adding ‘Underlying UK GDP growth appears to have remained weak, and the labour market has continued to loosen, leading to clearer signs that a margin of slack has opened up over time.’
- This dovish addition indicates a lean towards the more dovish risk scenario (demand weakening versus supply).
- The minutes noted the vacancy/unemployment ratio and the decline in PAYE payrolls decline as driving this. The BoE seems to still ignore the latter in its official forecasts.
- Stressing Middle East escalation risks. These are probably more clearly inflationary given energy proximity than tariffs (where the BoE is undecided on the price impact).
- BoE noting the beat in May food prices risks feeding into household inflation expectations. We agree this is a risk.
- Provisional estimates note tariffs may have a smaller impact than assumed in May’s MPR.
- Labour market and weak consumer spending remain the main rationales for the doves.
- More restricted supply (productivity), potential structural shifts in wage and price setting as well as higher food prices are upside inflation risks.
Overall, the release does not change my expectation for the BoE this year. We still expect the weight of bearish evidence to justify an August cut, followed by cuts in September and November, sufficient to take the rate to 3.5% by year-end. We still expect the BoE will cut to a terminal rate of 3% or lower.
On this basis, we remain long SFIZ6 in our model portfolio, targeting 97.0. The trade has performed well, rallying 22bp since our tactical re-inception after April’s CPI.
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