Money markets assign a roughly 60% probability* to the Bank of England cutting interest rates in June. But the Bank is keen to stress that the decision is still “data dependent” and not a done deal.

The most recent Bank of England meeting on May 9 was, as expected, a “no change” meeting, with interest rates held at 5.25%. But there were obvious changes since the March meeting – one more member of the 9-strong monetary policy committee had voted for a cut. While the ratio of “no change” to “cut” votes is 7-2, more members are likely to join the cohort in favour of a reduction in the coming months.

Since the Bank raised interest rates in August 2023, every subsequent press conference has featured the same question asked in different ways: when will you cut rates? And the answer was always inevitably: not yet. So the May press conference started on a similar footing with governor Andrew Bailey saying, “We are not yet at the point at which we can cut Bank rate”.

But a noticeable shift in the messaging had occurred. “Not yet … but soon” is the new guidance from the Bank. When governor Bailey said “a change in Bank rate in June is neither ruled out nor a fait accompli”, it’s the first time a specific month has been mentioned. Known for his extreme caution in choosing his words, this felt significant. “Fait accompli” is a direct echo of ECB vice-president Luis de Guindos, who told Le Monde that a June 6 rate cut by the European Central Bank is a fait accompli (money markets agree, assigning a more than 90% chance of this happening).

“The language and tone of today’s statement tells us that either way [the first BoE rate cut] will be sooner rather than later,” says Morningstar’s chief market strategist for Europe, Michael Field.

So the ECB is the first of the central banks to make a decision, on June 6, in a packed schedule which includes the Bank of England and the Federal Reserve.

Stock and bond markets have now adjusted to the changed narrative that, because of stronger inflation in the US, the Fed will not in fact “go first” and lead the world into monetary easing – as it led the Western world into monetary tightening.

The Bank’s Bailey responded to the suggestion that the UK is waiting on the Fed. “There’s no law that says the Fed moves first and everyone else has to follow,” he said at last week’s press conference.

A lot still depends on the UK’s economic data, with the Bank watching both inflation and jobs. April inflation numbers are due on May 22 and we’ve just had stronger-than-expected employment and wage growth data. In response to the latter data set, the Bank’s chief economist warned that this may have changed the outlook for rates once again.

Inflation Forecast to Fall, Then Rise Again

Still, the key inflation forecast is intact. While CPI fell to 3.2% in March, it is expected to fall in the coming months towards the 2% target, and even undershoot that, a prospect that seemed unlikely at the start of the year. But CPI is then expected to rise again as 2024 progresses, posing a dilemma for the Bank, which doesn’t want to raise a “mission accomplished” banner only for inflation to resurface again.

If the Bank were to cut rates in June, the Bank’s policymakers are keen to stress that monetary policy would still remain restrictive if official rates were cut to 5% next. So one cut is not necessarily the beginning of a rapid cycle of monetary easing, unwinding the 14 interest rate increases that we saw from 2021 to 2023. Interest rates are still at a 15-year high, rising from 0.10% to 5.25% in less than three years.

After the May press conference, industry expert reaction was mixed; some thought that the starting gun had been fired on a June cut, others thought that the Bank will wait. The first view was picked up by Tomasz Wieladek, chief European economist at T. Rowe Price:

“Overall, the guidance today is a strong signal to investors that the Bank of England will likely cut by more than markets expect this year. We now think the probability of a June cut is much higher and it is likely that the Bank of England will end up cutting three times this year.”

UK Rate Cut: If Not June, Then August?

But Henry Cook, senior economist, MUFG EMEA, argues that an August cut is more likely.

“Despite the optimistic tone of today’s meeting, it wouldn’t be a surprise to see policymakers err on the side of caution and wait until August to get the ball rolling with rate cuts.”

Having been criticised for being too slow to react to rising inflation, the Bank will be wary of easing monetary policy while inflation is still a threat. This theme was picked up by Shweta Singh, chief economist at Cardano:

“Whilst a June rate is likely, this is not our base case. The risk of moving too soon is still there.

“A policy mistake could ease financial conditions and cause a resurgence in inflation expectations, especially as the full effects of recent adjustments to state pension payments, benefits and minimum wage levels are yet to be see. Accordingly, we expect the MPC to err on the side of caution and wait until August to make their first policy adjustment for this cycle.”

The next Bank of England meeting is on June 20. After that the next decision is on August 1, when the Bank will produce its quarterly monetary policy report and press conference.

* Based on overnight index swaps traded on the Intercontinental Exchange (ICE) at May 15.