Bank Of England: Will It Lower Interest Rates In August?

June 26, 2024 00:29

The British pound (GBP) and the Bank of England (BoE) attracted some attention in the last few days as a series of data shed some light on the condition of the UK economy. Since the British pound is one of the most traded currencies in the world and the British economy one of the largest globally, news and insights coming from the UK may help traders adjust their trading strategies.

By reading this article, you will be able to learn more information regarding the latest BoE interest rate decision and what analysts forecast for the rest of the year when it comes to monetary policy adjustments.

BoE Keeps Rates On Hold But Opens The Door For Action 

The BoE’s Monetary Policy Committee (MPC) met on June 20th to discuss monetary policy and interest rates. As largely expected,  the BoE’s policymakers voted in favour of holding borrowing costs on hold that currently stand at a 16-year high. This was the seventh consecutive time that the BoE did not alter its interest rates. In addition, the UK’s central bank raised its forecasts for the second quarter’s GDP growth rate and inflation in the second half of the year.

The post-meeting statement noted that “June decision was finely balanced as higher-than-expected services inflation reflected factors that would not push up medium-term inflation.” The governing board predicts that “CPI to rise slightly in H2 2024 to around 2.5% as past falls of energy prices falls fade (May forecast: H2 CPI around 2.5%) and added that “staff forecast Q2 GDP +0.5% (May forecast: +0.2%), business surveys point to underlying quarterly growth of 0.25%."

Depicted: Admirals MetaTrader 5 - GBP/USD Monthly Chart. 
Date Range: October 1st 2016 – June 25th 2024. Date Captured: June 25th 2024. Past Performance is not an indicator of future results.


BoE Keeps Rates Unchanged As Inflation Falls To Target Levels

One thing that should be taken into consideration is that the BoE’s decision came just a day after the Office for National Statistics (ONS) announced that headline inflation in the UK fell to 2% in May on an annualised basis, matching the central bank’s target after three years. 

The report was highly unlikely to have an impact on the June 20th meeting outcome as the BoE’s policymakers would like to have more evidence regarding the economy’s cooling down. Low inflation figures though were noted in the BoE’s statement: “Good news is inflation is back at 2%, need to be sure that inflation will stay low before cutting rates. Will ensure bank rate is restrictive for sufficiently long to return inflation to the 2% target sustainably.”

BoE Interest Rates: What Do Analysts Forecast?

The “on hold” rate policy by the BoE’s board did not surprise global markets, with the British pound losing some small ground against the US dollar and the euro on June 20th. However, as inflation figures seem to return to viable levels since hitting record highs in the last two years, economists suggest that the UK’s central bank could consider taking some steps to relax its monetary policy and give UK consumers some room to breathe, relieving them from some of the financial burden that puts a strain on their budgets.

ING: Rate Cut In August?

ING economists believe that, when it comes to interest rates, pieces have started falling into place. The Dutch bank’s report, published on June 20th, said: “The notion is that the Bank is inclined to cut, and now the August meeting is shifting into focus as the baseline scenario. This is what our economists have flagged for a while now. The market implied probability for a cut at that meeting has tipped to 63%.”

ING’s analysts stress that “three rate cuts in 2024 starting from August remain ING’s base case, which is more dovish than the two cuts priced in by the market.” They also note that “the recent upside surprises in services inflation (5.7%) are attributed to volatility related to annual price hikes, not a significant trend, and while the BoE isn’t pre-committing to anything, an August rate cut is likely if the next inflation report doesn’t contain surprises.”

Rabobank: Forecast Regarding A September Cut Has Changed

Up until the last BoE meeting, Rabobank’s economists were forecasting two rate cuts, one in August and one in September. However, the latest developments seem to have convinced its economists that a September cut is no longer the case.

“The central bank appears to be preparing the markets for a first rate cut in August, which continues to be our base case. We have, however, removed a subsequent September cut from our forecasts. This follows yesterday’s services inflation data which remains a concern with notable differences of opinion within the MPC,” they note in their June 20th report.

Rabobank said that “BoE Governor Andrew Bailey didn’t add additional color to this meeting outcome,” while adding that there likely won’t be any updates from the BoE’s policymakers until after the election day on July 4th.

TDS: 50 Basis Points Rate Cuts In 2024?

TDS economists were not surprised by the BoE’s interest rate decision nor by the 7-2 split among the MPC members which was also anticipated. According to a note to investors, they suggested that “markets appear relieved that this week's stronger than anticipated service inflation data did not derail the MPC's rate cut cycle guidance. In fact, the Committee also acknowledged that the stronger than anticipated service inflation was driven by one-off pay factors.”

After last week’s data sets, TDS sees a 15bps rate cut in August, followed by a total of 35 bps cuts until the end of the year. “The front-end is now pricing in around 15bp in cuts for August meeting and around 50bp in total for 2024. We believe risks could be 'finely' balanced as there is still a lot of information markets need to absorb ahead of the next meeting, including elections on July 4 and CPI data on July 17,” they mention in their report.

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This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Please note that such trading analysis is not a reliable indicator for any current or future performance, as circumstances may change over time. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.

Miltos Skemperis
Miltos Skemperis Financial Content Writer

Miltos Skemperis’ background is in journalism and business management. He has worked as a reporter on various TV news channels and newspapers. Miltos has been working as a financial content writer for the last seven years.