Vanguard's BoE Preview: We maintain our view that the Bank will start cutting rates in August

Shaan Raithatha, senior economist at Vanguard Europe, provides preview commentary ahead of the Bank of England’s Thursday meeting.

She said: “We expect the MPC to offer little change in guidance at Thursday’s meeting. The data published in the last six weeks has come broadly in line with the forecasts laid out at the February Monetary Policy Report (see below).

“They will therefore re-emphasise the need to see more data before committing to rate cuts and will highlight the risks of still-elevated wage and services inflation. However, they are also likely to signal a degree of comfort with markets pricing in easing later this year given the restrictiveness of the current policy setting, continued below-trend growth and evidence that wage and underlying inflationary pressures are moderating. 

A summary of the main data releases since February’s meeting below:

1. Activity: GDP contracted by 0.3% in Q4 (BoE expected no change), consigning the UK to a technical recession. This was offset by a 0.2% rebound in January (month-on-month). Together with a PMI reading above 50 and green shoots in the housing market, we view the worst to now be over.
2. Inflation: January’s CPI print was encouraging, with services inflation undershooting modestly on both an annual and monthly basis. That said, the BoE will treat the data with caution given the surprise was driven by volatile components including airfares & accommodation and will look to the February data released on Wednesday for confirmation of any trend.
3. Wages: A strong report in December was offset by a weak number in January. Overall, private sector wage growth is clearly slowing on a sequential basis, tracking 0.2% month-on-month on average in the last six months, compared to 0.7% in the six months prior. If momentum continues at its current pace, annual wage growth should drop below 4% in Q4, in line with signals from surveys. The effects of the upcoming rise in the National Minimum Wage poses a key upside risk, however. 
4. Spring Budget: Chancellor Hunt’s statement, the highlight of which was an additional 2p cut to national insurance contributions for workers, should raise the level of GDP modestly (0.2-0.3%). However, some of this increase will be attributed to additional supply, which means a smaller effect on the output gap and inflation. 

“We maintain our view that the Bank will start cutting rates in August. Our base case is for a 25bp cut at every meeting thereafter, leaving Bank Rate at 4.25% by year-end. Risks are skewed towards a slower pace of easing, particularly if wages and services inflation moderate more slowly than we expect.”