Market Report - 01/08/2024
Bank of England begins a monetary loosening cycle
The Bank of England’s monetary policy committee made its eagerly anticipated decision to cut UK interest rates today by 0.25%, as expected, after seeing inflation drop back to its 2% target in both May and June.
The decision to cut, brings the Bank’s interest rate to 5% and is it’s first since an emergency cut made back in March 2020. Since then, the MPC have raised rates from 0.1% to 5.25% between December 2021 to August 2023.
The BOE have finally decided to ease policy as inflation has moved down to their target of 2%. The Bank’s monetary policy committee voted 5-4 in favour of a reduction by 25 basis points (Andrew Bailey, Sarah Breeden, Swati Dhingra, Clare Lombardelli and Dave Ramsden all voting in favour). In the minutes released alongside the rate decision, the MPC outlined that despite cutting, they must remain “restrictive” until inflationary risks have dissipated, cautioning that they will require inflation to return sustainably to its 2% target.
The MPC also outlined that they “expect the fall in headline inflation, and normalisation in many indicators of inflation expectations, to continue to feed through to weaker pay and price-setting dynamics”. They also pointed out that average growth fell by 56% in the three months leading up to May, while services consumer price inflation declined to 5.7% in June.
The Governor, Andrew Bailey also warned that the Bank must not “cut interest rates too quickly or too much” and re-affirmed that they “need to make sure inflation stays low”. Despite the cut today, Chancellor of the Exchequer Rachel Reeves who has welcomed the Bank’s decision, has pointed out that mortgage rates remain too high.
In the minutes following the announcement, GBPUSD and GBPEUR dropped by circa 0.3% before recovering back to the levels we saw just prior to the 12pm release (at the time of writing). Both currency pairs are sat back within their recent trading range, meaning that investors had likely priced today’s cut and narrative into their expectations.