Split decision within Bank of England dampens expectations for prompt reductions in interest rates
Rewritten Article:
Caught off guard, investors faced a three-way split among Bank of England policymakers last Thursday, casting doubts on anticipated faster interest rate cuts due to global trade chaos in the months to come.
However, the BoE's Monetary Policy Committee delivered a clear message to the markets: their primary focus remains the domestic economy, the key determinant of UK inflation and monetary policy.
According to BoE governor Andrew Bailey, after the decision to reduce interest rates to 4.25%, global tariffs' overall influence on inflation is still ambiguous. They could drag down export prices and escalate production costs via global supply chains, but at present, the UK's domestic wage growth is the primary driver of inflation.
"Interest rates aren't on autopilot. They can't be," asserted Bailey. He emphasized that the MPC must stay cautious in responding to changing economic circumstances.
While committee members viewed various risks differently, resulting in a split decision, Bailey acknowledged that a UK-US trade deal, announced on the same day, would only partially counterbalance the potential negative impact of tariffs on UK inflation. The larger impact is expected to stem from risks related to the US-China relationship.
The BoE's latest central forecast suggests tariffs would modestly affect the UK economy, trimming the GDP by 0.3% and inflation by 0.2 percentage points over a three-year forecast horizon, compared to its February projection.
"This isn't a harbinger of doom," clarified Bailey about the downgraded growth forecast. Despite delicate business confidence, the MPC foresees stronger consumer spending and a surge in housing investment, driven by the government's planning reforms, offsetting weak corporate investments.
More conservative MPC members fear households may become overly sensitive to short-term price fluctuations following the cost of living crisis. This could translate into more prolonged inflation as workers seek higher wages to defend their living standards.
Influential MPC member Huw Pill shifted his stance to a more hawkish view, joining Catherine Mann in voting to maintain rates at 4.5%. Even among the policymakers who approved a quarter-point rate reduction, several expressed a close balance between no change and a cut, hinting that global trade developments had decisively swung the vote.
As per economist Sandra Horsfield of Investec, the MPC's varied views suggest a dynamic outlook for interest rates. Ruth Gregory, consultant at Capital Economics, expects the BoE's rate cuts to slow down, with only two more quarter-point cuts likely by the end of the year.
However, Pantheon Macroeconomics' Chief UK Economist Rob Wood cautioned that the MPC has left open the possibility of faster changes if US policy intensifies demand shocks or if there are signs of major labor market cracks in the UK.
- The Bank of England (BoE) signaled a focus on the domestic economy in terms of UK inflation and monetary policy, despite the global trade chaos that may affect interest rates.
- Andrew Bailey, BoE governor, noted the ambiguous impact of global tariffs on inflation, stating they could potentially affect export prices and production costs.
- Describing the interest rate decision, Bailey mentioned they aren't on an autopilot and require careful response to varying economic circumstances.
- Bailey acknowledged that a UK-US trade deal would only partially offset the potential negative impact of tariffs on UK inflation, highlighting the larger influence from the US-China relationship.
- Economists expect the Bank of England's (BoE) rate cuts to slow down, with only two more quarter-point cuts forecasted by the end of the year.
- One BoE policymaker, Huw Pill, shifted his stance to a more hawkish view, joining others in maintaining rates, while others voted for a quarter-point reduction.
- The varied views among BoE policymakers suggest a dynamic outlook for interest rates, hinting at the possibility of faster changes if US policy intensifies demand shocks or if there are major labor market cracks in the UK.
