BoE holds rates to wait for further data, while ECB proceeds with first rate cut since 2019
Summary
The Bank of England (BoE) kept rates on hold at 5.25% as expected, with few changes to its statement and no press conference due to election campaign restrictions. The Monetary Policy Committee (MPC) vote remained unchanged, with seven members voting to keep rates on hold and two members voting for a 25-basis-point cut. However, the decision was described as "finely balanced" for some policymakers, suggesting potential support for a rate cut in August.
The European Central Bank (ECB) cut interest rates this month, the first in nearly five years and the second of the Group of 10 (G10) central banks, after Canada’s rate cuts the day before. The ECB lowered its main refinancing rate to 4.25% and the deposit rate to 3.75%. As the Central Bank seeks to prevent markets from pricing in cuts that could fuel inflation, ECB President Lagarde stated that if inflation continues to decline, there may be further rate cuts.
Bank of England
The BoE’s decision aligned with market expectations, following recent stronger-than-expected wage growth and persistent high service sector inflation. Although there were no major changes, the market perceived the decision as slightly dovish, leading to a 0.20% weakening of the GBP and a dip in U.K. government bond yields.
Subtle hints suggest an August rate cut is possible, with just three MPC members needed to switch from a finely balanced on-hold decision, to voting in favour of a rate cut. In addition, the statement suggested less concern over the persistence of services inflation, which slowed only to 5.70% last month from 5.90% in April, "The upside news in services price inflation relative to the May report did not alter significantly the disinflationary trajectory that the economy was on.”
Furthermore, the Bank’s surveys of consumer inflation expectations and company wage growth expectations both fell this month, suggesting these forward-looking components are supportive of further cooling in price pressures, requiring a less restrictive stance.
Source Chatham Financial, EURIBOR forward curves
European Central Bank
As widely expected, the ECB cut eurozone deposit and lending rates by 25 basis points at the June meeting, having kept rates at peak levels for nine months. Since the peak in borrowing of the ECB refinancing rate last September, consumer price inflation has decelerated from 5.20% to 2.60%.
President Lagarde made it clear that the Governing Council has become more confident in returning inflation to target in the medium-term, with inflation expectations having declined “at all horizons.” Lagarde added a note of caution, saying, “Despite the progress over recent quarters, domestic price pressures remain strong as wage growth is elevated, and inflation is likely to stay above target well into next year.”
Lagarde’s comments were supported by upward revisions to the ECB’s inflation forecasts, with the CPI expected to average 2.50% in 2024 and 2.20% in 2025, up from its previous forecast of 2.30% and 2.00%, respectively. The ECB also cautioned that it was “not pre-committing to a particular rate path,” treading carefully following higher-than-expected inflation and wage data released in the last month.
Moving forward
Although market pricing for an August rate cut by the BoE didn’t shift materially following today’s meeting, the likelihood of a September cut increased to above 90.00%, indicating the market is certain a rate cut is coming soon. There is only one inflation and employment report prior to the August meeting, so unless there is a material shift, it could be a close call. Once the election is over and the MPC can make public comments, we’ll have a clearer understanding of the consensus for the next meeting. Regardless, a rate cut seems likely in the third quarter.
With the ECB seemingly ruling out a follow-on rate cut in July, investors will closely monitor inflation data over the summer to see if the disinflationary trend resumes, having stalled in recent months. The latest wage and price data have been stronger-than-expected, raising concerns among ECB policymakers that inflation will remain above their 2.00% target.
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