The markets and economists expect the Bank of England to keep rates on hold at its meeting on 19 September, with a cut in November, and possibly also in December looking more likely.
On the one hand, headline inflation remained unchanged in August, at 2.2% year-on-year, while a weakening PMI output price balance points to inflationary pressures subsiding.
However, on the other hand, core inflation rose more than expected, to 3.6% year-on-year in August, from 3.3% in July. While solid growth is supporting strong labour markets, the year-on-year pace has eased in recent months, average earnings excluding bonuses still rose 5.1% year-on-year in the 3 months to end July – even allowing for quite rosy productivity growth assumptions, this level of earnings growth is too high to be consistent with the BoE’s 2% target.
Low unemployment and solid wage growth are, in turn, keeping inflation in the more labour-intensive services sector elevated which, rose to 5.6% year-on-year in August, from 5.2% in July.
Given the mixed bag of ongoing disinflation, but from elevated levels and with signs of stubbornness in some key measures, we still think the BoE is likely to signal further rate cuts, but at a gradual pace that slowly makes policy less restrictive, as opposed to adopting stimulative settings.
Slightly further out, the market is already pricing a fair degree of further cuts, anticipating the bank rate to fall to 3.3% pa by the end of 2025.
One more item to look out for on this week’s agenda is the BoE’s announcement on the pace of Quantitative Tightening. Commentors largely expect the BoE to continue at a pace of £100bn per year, made up of £87bn in redemptions and £13bn active sales. The market seems most sensitive to the active sales part and so any upside surprise in the pace of QT may have scope to cause a little short-term indigestion.
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