A cautious cut

Melanie Baker, Senior Economist, Royal London Asset Management:

"Consensus expectations were for a cut today, but in advance of the decision this was widely being described as a 'close call'.  In the event this very much came across as a close call: The vote was 5-4 and even some of those cutting rates described the decision as 'finely balanced'.

"Inflation has fallen significantly, and you can regard today’s cut as reflecting the significant progress that has been made on reducing inflation. The MPC has become sufficiently confident on the path of inflation to reduce the degree of monetary policy restriction. Note that this 25bp cut still leaves interest rates in restrictive territory and the language around today’s decision didn’t suggest that we should expect a large, swift rate cutting cycle from here. 

"The committee had been flagging that it was focused on three areas of data in particular: The state of the labour market, pay growth and services inflation. 

• The minutes note that it judged that the labour market has continued to loosen (but remains tight by historical standards)
• Pay growth has been slowing (but remains elevated)
• Services inflation still isn’t much below 6% year-on-year. That’s too high, in my view, if you want to be confident of sustainably hitting a 2% inflation target. In the minutes they note that services inflation 'had remained elevated'. However, looking at the views of those voting to cut today, 'the recent strength in services inflation had in part continued to reflect more volatile components of this series'. 

"In the light of the mix of data, it is perhaps not surprising that the messaging around the rate cut was cautious/hawkish. Governor Bailey talked about them being ‘highly alert’ to inflation persistence. He talked about the key indicators of inflationary pressures remaining elevated. Early in the press conference, the Governor also said that they need to be careful not to cut rates too quickly. He also outlined a scenario, one that he said put some weight on where inflation proves more persistent than their 'benign' central case.  

"For now, I continue to expect another (data dependent) cut in interest rates later this year (November as a central case) and a gradual and relatively limited rate cut path beyond that. That gradual, cautious approach would fit the messaging above. With the economy not falling into recession and services inflation relatively sticky it makes sense for the Bank to tread carefully."