May Inflation to be Mixed, BoE to Pause but Expect More Cuts From August

Summary

• With no presser and no update to forecasts, the BoE’s policy announcement is unlikely to be eventful.
• While cracks continue growing in the UK economy, data has not derailed sufficiently enough for the BoE to change tack.
• We expect inflation to roughly align with May’s MPR: headline below consensus but core higher.
• We analyse recent BoE comments and expect they resume cutting in August.

Market Implications

• Our base case remains for the BoE to cut at least to 3.5% in 2025.
• We stay long UK real rates (10Y linkers) and long SFIZ6 in our model portfolio.

BoE to Pause With Limited Change in Tone

We expect the BoE will leave the Bank Rate unchanged at 4.25% this week in line with consensus. Without a presser or updated forecasts, it is unlikely to be a particularly interesting meeting. It has been our longstanding view that the MPC will not have sufficient push from data to accelerate cuts until August’s meeting, though we see the economic deterioration bubbling below the surface.

Inflation and labour market data remain in line with May’s MPR forecasts, but the detail is becoming more dovish (Charts 1 and 2). The deterioration in actual employment and suppressed wage-intensive services inflation is significant.

We think the labour market will continue deteriorating versus BoE and market expectations, and that the BoE hawks’ fears of consumer bounce-back are overdone.

Our base case remains for the BoE to cut at least to 3.5% in 2025. We stay long UK real rates (10Y linkers) and long SFIZ6 in our model portfolio.

Expect Mixed UK Inflation: Concentrate on the Details

We expect UK inflation (released Wednesday) will approximate BoE estimates from May. Last month’s inflation beat was far more benign in the detail than the aggregates suggested and included Easter’s impact and a 0.1ppt (headline) error in VED weightings. These should reverse in May’s numbers (Table 1).

Upward impetus in airfares (+27.5% MoM), rail travel (+2.9% MoM) and package holidays (+2.3%) appear at least in part due to Easter timing effects, suggesting a reversal in May. There will probably be give-back in sea travel too.

Conversely, rental inflation missed the typical April rise, suggesting risk of a bounce-back if sampling timing played a role (April sees rises in social rent cap and tends to see private rental rises too). We tentatively assume a higher than typical May rise but the BoE should look through this.

We have lower conviction than typical given uncertainty in Easter’s impact and the VED revision. Our forecasts are mixed versus consensus, with lower headline but higher core, and similar services. More importantly, we still expect momentum in wage-intensive sectors to remain capped.

BoE Statement Tone to Remain Unchanged

Given lack of strong data changes (in the BoE’s view) since the surprisingly hawkish May meeting, we expect little change in the statement. As such, the BoE likely retains a ‘gradual and careful’ approach and says there is no ‘pre-set path.’

Pill, who was more hawkish than expected at May’s meeting in voting for no cut, clarified his position as more cautious on the fear there had been permanent changes to pricing behaviour, rather than justified by data.

Mann, who also backed no cut, clarified she feared a non-linear deterioration in the labour market in February (when she backed a 50bp cut). In May, she decided inflation was not decelerating to 2% (goods prices rising not falling) and the labour market had not loosened, justifying her vote for a pause.

Furthermore, she noted financial markets had eased a lot and higher volatility in inflation suggested upward bias to CPI, with 4% inflation a threshold that changes consumers’ attitude to inflation.

Bailey disagreed strongly with Mann’s inflation view, seeing it in line with the MPR. The labour market has loosened somewhat. Official numbers for pay are above what is consistent with the target and unaligned with past relationships but below where they had expected in February. Agent surveys and trips around the country tell him that pay is decreasing. Bailey is more in the wait-and-see camp and would not have cut if not for the tariffs.

Bailey seems unsure whether they are inflationary or disinflationary. He seems happy to be cautious and delay decisions provided there is no threat to the integrity of the inflation anchor (as is currently the case).

Breeden was a little more dovish than Bailey, believing the domestic process was enough for a cut, even without tariff risk. Persistence and spare capacity are key, with the former based on wages, which she still sees as aligning with agents’ surveys (3.7-3.8% growth by end-2025). She sees no evidence that persistence is higher than expected.

Dhingra remained dovish and was encouraged by global developments that had not seen a breakdown in supply chains (inflationary trade story). She does not see CPI’s tick-up as feeding into household expectations.

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