BoE cuts rates for the first time in over four years, ECB keeps rates unchanged
Summary
The Bank of England (BoE) cut U.K. interest rates for the first time since the onset of the COVID-19 pandemic in March 2020. In a "finely balanced” decision, the Monetary Policy Committee (MPC) voted 5-4 in favour of cutting rates from 5.25% to 5.00%. However, policymakers struck a hawkish tone in the accompanying statement, warning that rates should not be cut “too quickly or by too much.”
The European Central Bank (ECB) held its deposit rate steady at 3.75% as expected in July, having cut rates from record highs in its previous meeting. In the subsequent press conference, ECB President Christine Lagarde stated that the decision to keep rates on hold was unanimous but left the door “wide open” for a further 25-basis-point cut in the upcoming September meeting, predicting that inflation across the eurozone would continue to fall.
Bank of England
In a contested decision, the BoE cut U.K. interest rates from a 16-year high of 5.25% to 5.00%. Three additional members of the MPC voted to cut rates by 25 basis points, resulting in a slim majority of 5-4 in favour of a cut, the first in over four years since the beginning of COVID.
In his accompanying statement, BoE Governor Andrew Bailey, one of the policymakers who voted for a rate cut, stated that inflation had “eased enough” for the Central Bank to start cutting rates. However, he quickly caveated with a cautionary note, stating that policymakers must “be careful not to cut interest rates too quickly or by too much” to “ensure low and stable inflation.” The decision follows headline inflation remaining at 2.00% in June, but services inflation continues to remain stubbornly high at 4.00%.
The latest BoE inflation forecasts accompanied the decision, illustrating that the Central Bank expects inflation to rise over the rest of 2024 to as high as 2.75%, before steadily falling to 2.40% in 2025. While down from the previous forecast in May of 2.60%, the BoE doesn't expect inflation to fall below the 2.00% target until 2026, in line with previous forecasts.
European Central Bank
In line with market expectations, the ECB held deposit rates at 3.75%, after cutting rates for the first time in nearly five years at their June meeting. Lagarde’s accompanying comments emphasized a data-dependent approach leading up to the September meeting, avoiding any pre-commitment to future rate paths.
The decision to hold rates represents the Central Bank’s more cautious stance as the Governing Council navigates between concerns over sticky service sector inflation and a worsening economic outlook. Inflation unexpectedly ticked up across the eurozone in July from 2.50% to 2.60%, compared to forecasts of 2.40%, indicating a stall in the disinflationary trend seen in recent months. Eurozone PMI data was weaker than expected, making the ECB cautious about holding rates high for too long and risking a recession.
Despite this, the ECB has made it clear that it would not be swayed by individual data releases and would rather focus on the overall economic trend. The ECB’s third quarter forecasts expect inflation to hover around current levels for the rest of this year, eventually returning to the 2.00% target in 2025.
Moving forward
Market pricing did not materially shift following the latest inflation print, signaling that recent lacklustre economic activity trumps worries about an inflation resurgence in the eyes of the ECB. The current implied probability of a second-quarter-point rate cut in September sits at 70.00%, with a third priced in before the year is complete.
Following the decision to cut rates, the BoE stated that they will decide on the “degree” of policy restrictiveness on a meeting-by-meeting basis. Market pricing suggests that a second 25-basis-point cut at the September meeting is more likely, but key wage and price data releases before then will help paint a clearer picture.
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