ar
The Bank of England will announce its interest rate decision on Thursday August 7, with markets speculating a 25-basis-point rate reduction that will bring interest rates down to 4%. The BOE’s expected decision comes as the UK continues to face rising inflation, a slowing economy, and fiscal policy uncertainty. Divided opinions within the BOE’s Monetary Policy Committee alongside mixed economic data could continue to complicate the central bank’s decision-making process.
Expected Rate Cuts and Divergent Views
The BOE is widely expected to cut rates from 4.25% to 4%, marking the 5th rate cut since the beginning of its rate cycle in 2023. Financial markets are also pricing in 2 more rate cuts by next summer, which could bring rates down to 3.5%. So far, the MPC has applied a cautious stance on making changes to monetary policy. ⁽¹⁾
The MPC has been divided, with dovish members such as Alan Taylor and Swati Dhingra pushing for a larger cut due to rising concerns on rising risks on the UK labor market and easing wage pressures. On the opposite side, hawkish members including chief economist Huw Pill, are mostly focused on persistent inflation which reached 3.6% in July and could rise more. ⁽²⁾
Inflationary Pressures Remain High
Inflation remains the main concern for the BOE. Inflation peaked at 11% in late 2022, primarily driven by higher energy prices. Inflation bottomed in September 2024 at 1.6% and has since rebounded to 3.6%. The BOE is not expecting inflation to return to its 2% target until early 2027. ⁽³⁾
This spike is mostly due to temporary factors, but the BOE fears that households have become more sensitive to spikes in inflation, especially for essentials like food, which could lead to higher wage demands in anticipation of continued inflation.
Troubled Labor Market
UK employment fell for the fifth consecutive month in June, and wage growth slowed, signaling that the government’s tax increases, higher minimum wages, and the US trade tensions are adversely impacting the jobs market.
Employers cut headcount by 25,000 in May, according to the Office for National Statistics report in a revision to its previous estimate of a 109,000 decline. Early estimates for June showed a further decline of 41,000 that would leave staff numbers down by 178,000, or 0.6 per cent, over the past year. The unemployment rate rose to 4.7 per cent in the three months to May, up from 4.6 per cent a month earlier. These trends could indicate a more dovish approach from the BOE. ⁽⁴⁾
While June’s figure is also likely to be revised, the run of job losses indicates the small impact of the £25 billion increase in national insurance contributions announced in Rachel Reeves’ October Budget. Employers have cut staff in seven of the eight months since the announcement. ⁽⁵⁾
Weakening employment conditions often signal broader economic softness ahead, suggesting that monetary policy may need to become more supportive to prevent a deeper downturn.
BOE’s Approach and Future Expectations
Unlike the Federal Reserve, which held rates steady during their previous meeting, the Bank of England is focusing on growth concerns over the rise in inflation. BOE Governor Andrew Bailey has indicated a cautious approach with gradual rate cuts. However, the divided opinions within the MPC and mixed economic data may complicate future decisions on interest rate reductions.
Governor Bailey will speak in a press conference after the announcement of the decision, where economic forecasts and other statements related to the decision will be released, providing further insights into the UK’s economy and the next BOE meeting.
