The Old Lady of Threadneedle Street has clearly seen enough in recent data to reassure policymakers that the underlying disinflationary trend within the UK economy remains intact, having delivered the first rate cut of the cycle this lunchtime, taking Bank Rate to 5.00%.
A cut which, pre-decision, markets had only viewed as a roughly 2-in-3 chance, emphasising the knife-edge nature of the August meeting.
The vote split also spoke to how close a call the decision proved to be, with Governor Bailey using his casting vote to break a deadlocked MPC, forcing through a rate cut by a 5-4 margin, with four members – including Chief Economist Pill, dissenting in favour of maintaining Bank Rate at a post-GFC high.
Beyond the immediate rate decision, the MPC’s forward guidance points to a relatively slow and steady path of further policy normalisation, with the Committee continuing to flag a need for policy to remain restrictive for “sufficiently long”, while also noting how risks to the inflation outlook are skewed to the upside.
Governor Bailey also sounded a note of caution over cutting ‘too quickly, or by too much’, likely disappointing some of the more dovish members of the MPC.
Looking ahead, a relatively gradual quarterly pace of cuts seems most plausible for the Old Lady, with further normalisation likely to coincide with meetings at which a Monetary Policy Report is published, leaving the base case as just one more cut this year, at the November meeting.
Such a pace would be broadly in line with that priced by markets, and that likely to be delivered by other G10 central banks, potentially limiting any prolonged GBP downside on the back of today’s decision.
