The Bank of England is set to decide on its interest rate on Thursday. Although inflation has now fallen to its target level of 2%, it may rule out a rate cut until August.
Despite a rate reduction by the European Central Bank, the Bank of England (BoE) is widely expected to keep the policy rate at 5.25% on Thursday, although inflation in the UK eased to the 2% target level in May. The bank is likely to maintain a cautious tone on the rate trajectory and signal that a rate cut may be on the horizon later this year, possibly in August, according to Reuter’s consensus.
The economic trajectory may encourage an August cut
Recent economic data showed that the UK’s economy has slightly improved, with first-quarter GDP growth rising to 0.6% from a 0.3% contraction in the final quarter of 2023. However, average earnings growth remained at 6% in the first three months, exerting upward pressure on inflation, despite an increase in the jobless rate to 4.3%.
Nevertheless, the BoE has slightly shifted towards a dovish stance since the last meeting, with two committee members voting for a rate cut, marking the first time since January 2020. Inflation figures remain a primary consideration for the bank’s interest rate decisions. According to a consensus conducted by Reuters, the UK’s Consumer Price Index (CPI) may ease to 2% year-on-year in May, which would be an encouraging sign for the BoE to consider initiating a rate reduction in its next meeting. However, the central bank is likely to adopt a wait-and-see approach to assess whether the cooling inflation trend is sustainable.
The global trend of inflation is going downward, and some central banks, such as the Swiss National Bank (SNB), the ECB, and the Bank of Canada (BOC) have already delivered a rate cut. The Federal Reserve in the US has signalled at least one cut this year, and the Reserve Bank of Australia (RBA) is yet to clarify its cash rate outlook.
Shaan Raithatha, Senior Economist at Vanguard, wrote in a note: “We continue to call for an August rate cut,* with a quarterly cadence of easing thereafter. The MPC are itching to start cutting rates as soon as the data allows. Risks are skewed towards a later, and slower, trajectory of easing.”
Other factors that could delay BOE’s rate decision
Aside from economic factors, two events that may also delay the BoE’s rate cut decision are the upcoming general election in July and Taylor Swift’s concert in the UK.
Prime Minister Rishi Sunak called a snap general election which takes place on 4 July amid fading support for his Conservative Party. The recent political turmoil in the EU Parliamentary Election suggests that European leaders are facing challenges for their next terms. The BoE may wait until the political uncertainty settles to make a decision, although Governor Andrew Bailey indicated in the last policy meeting before the snap election was called that a rate cut before a general election should not be an issue.
Taylor Swift’s Eras Tour has been boosting consumer spending in all locations where her epic concerts have been held. The phenomenon is even dubbed as “Swiftonomics”. According to Barclays’ forecast, the event is expected to contribute up to £1 billion to the British economy. Spending, including accommodation, travel, and clothing, may average £848 per person. Earlier this month, Swift’s shows generated approximately £77 million in Edinburgh, according to the local council. The world’s most popular singer is scheduled to perform at Cardiff in Wales, and London later this month. This may buoy the UK’s economy by improving retail sales and business confidence, at least temporarily, this month. Resilient economic indicators may delay the BoE’s decision on a rate cut.
