Little urgency evident from the BoE
The MPC did little to endorse market tightening expectations in their June rate decision, maintaining Bank Rate at 3.75%, while offering no major change in guidance.
The 7-2 vote split, with two committee members indicating a preference for higher rates, landed broadly in line with consensus and our own pre-announcement expectations. Overall, these latest communications seem to indicate a Bank that is happy to wait and see, with minimal urgency evident.
Admittedly, we would note that most committee members did indicate a willingness to hike rates if evidence of second-round effects on inflation began to emerge. But only Pill and Greene thought such action necessary now. For the remainder of the MPC, a wait-and-see approach was deemed more prudent. Indeed, a majority of the committee flagged a weakening labour market and broader economic softness as factors weighing against any decision to increase rates.
With that in mind, there were three particularly notable sections in today’s Monetary Policy Summary and Minutes.
First, the "current economic conditions" section noted that "inflation was now expected to be a little under 3% in 2026 Q3 and pick up to a little over 3¼% in Q4.
This was below the path expected in the April Report, reflecting both lower energy and non-energy prices." This is below the path set out in both Scenarios A and B of the May MPR, reflecting a significant downward revision to prior Bank staff forecasts, with the language on energy suggesting that reduced second-round effects are now expected.
Second, the discussions observed that “If higher inflation were to reflect mainly direct energy effects and second-round effects were to remain contained, there was a stronger case for tolerating a slower return of inflation to target, in the context of weak activity. However, there would be a more challenging trade-off if higher energy prices appeared to be feeding into more persistent domestic inflation. In that event, the weight placed on output stabilisation would be likely to diminish, and policy would need to remain restrictive for longer, or become more restrictive.”
The point about tolerating elevated inflation, in the context of output stabilisation, is particularly interesting. While clearly upside inflation risks dominate the MPC’s immediate thinking, this seemingly opens the door to the possibility of a rate cut later in the year, provided inflation remains relatively well behaved.
Third, a related note from Bailey in his views paragraph reinforces our conviction here, saying, “Our remit recognises that attempting to bring inflation back to the target too quickly may cause undesirable volatility in output. Given the context at present of softness in the real economy and uncertainty around the scale and duration of the shock to energy prices, tolerating temporarily above-target inflation as part of a return to target is an appropriate way to approach the trade-off, providing inflation expectations remain contained.”
All told, then, we are inclined to read today’s decision as leaning a little dovish at the margin, despite Greene joining Pill in voting for a rate hike, and the MPC’s overall lack of urgency to shift policy in the near term. The evolution of data continues to remain key, however, containing the immediate FX impact. Sterling has softened modestly post-event, but a continued path lower will depend on further signs of economic weakness, and on domestic political risks. Indeed, with the Makerfield by-election taking place today, it is the latter factor that now looks set to dictate the next leg for sterling.