On 1st August, the Bank of England’s Monetary Policy Committee (MPC) decided to reduce Bank Rate by 0.25% to 5.00%.

Here Ross Barr, Senior Multi-Asset Strategist at Cardano, comments on the latest decision:

This was in line with our expectations albeit, ahead of the decision, there was no clear consensus evident in market pricing as to how the MPC would act.

The MPC’s decision was not unanimous. Four dissenting voters preferred to maintain rates at the 5.25% level. The gilt market, which had been rallying over the past 2-3 days was little changed on the news.

The Bank continues to finely balance the progress that has been made in slowing inflation over the past 18 months with the lingering threats that persist. Notably, service sector inflation is still elevated, the labour market is tight and wage pressures continue. The Bank continues to forecast a small rise in inflation during the remainder of the year as a result of year-over-year energy prices comparisons, however, this base effect has not dissuaded the majority of the MPC from voting to cut rates today.

Inflation trends should continue to improve

Headline inflation matched the Bank’s 2% target in both May and June and we do expect underlying inflationary pressures to continue to ease gradually through the year. Nevertheless we also expect the Bank to move cautiously.

The overall tone of the MPC’s statement is consistent with this view. Looking ahead the statement references the expectation that “Domestic inflationary persistence is expected to fade away over the next few years”.

Yesterday, the Federal Reserve maintained their policy rate at 5.25%-5.50%. Chairman Powell drew attention to weakening in US labour markets and suggested that a rate cut may be forthcoming in September so that they can stay in line with their dual employment / inflation mandate.

Early signs from the Labour government highlight fiscal constraints

Now four weeks into their tenure, the new Labour government is starting to flesh out more details of their fiscal plans. Chancellor Reeves statement to the House this week highlighted the constraints that they are working within. Whilst a return to 2010-style austerity is unlikely, the reining in of capital expenditures, departmental savings, means-tested Winter fuel payments and the axing of Conservative party reforms to social care costs all point in the same direction. There is very limited scope to deliver any expansionary fiscal policies given the UK’s net debt rule.

The overall outlook for the UK economy is modest; we continue to expect to see only a shallow recovery to continue through this year and into 2025. Market consensus has moved towards our long-standing cautious view. The onus may well fall upon monetary policy to support the UK economy as recovery progresses into next year. At present, the Bank continues to highlight that monetary policy settings remain restrictive and would remain so even if Bank Rate were to reduce further.