MNI: BOE Splits 5-4 In Favour of 25 bps Cut At August Meeting

The Bank of England Monetary Policy Committee delivered a 25 basis point cut to 5.0% at its August meeting on the narrowest possible majority, a 5-4 vote in favour, with Chief Economist Huw Pill among those backing unchanged policy.

BOE Governor Andrew Bailey said in a statement that they had to be careful not to cut "too quickly or by too much" and some of those who voted for a lower policy rate said that the decision was "finely balanced."

The minutes showed that the MPC continued to divide into two different world views, those who believe that as the effects of the past shocks faded inflation pressures were moderating and those who continued to be concerned about inflation persistence, with structural changes having occurred and wage growth remaining elevated.

Even in the pro-cut camp "for some ... the decision was finely balanced. Inflationary persistence had not yet conclusively dissipated, and there remained some upside risks to the outlook," the meeting minutes noted.

FORECASTS

The forecasts in the Monetary Policy Report showed that on market rates the mode for CPI was 1.7% in two years and 1.5% in three years. The forecasts had an upside skew of 0.3 percentage points at both the two and three year points, reflecting the MPC's view that the risks to the story of inflation heading markedly below target were to the upside.

On the vote split. new Deputy Governor Clare Lombardelli at her first meeting, Deputy Governor Sarah Breeden and Governor Andrew Bailey all backed the 25 bps cut, joining Swati Dhingra and Deputy Governor Dave Ramsden, who had previously voted for lower rates and made their support for easing at this meeting clear.

Members of the no change camp made clear that their concerns over inflation persistence were deep seated.

WAGES

They argued that underlying domestic inflationary pressures appeared to have become entrenched, r-star, the medium-term equilibrium interest rate may have risen and that second-round effects were having a greater impact on wage and price setting than reflected in the modal, or most likely, forecast.

The 5.5% rise covering many health and education workers announced by new Chancellor of the Exchequer Rachel Reeves on Monday came too late to be included in the forecast.

The detailed forecasts showed sizeable upward revisions to near-term GDP growth, which was shown at 1.25% this year compared to a 0.5% estimate previously, although 2025 growth was left unchanged at 1.0%. Household consumption growth was raised to 0.5% this year from 0.25%, with private sector earnings growth left unchanged at 5.0%.