Bank of England Vote Breakdown Firms Odds of August Rate Cut

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The maintenance of a quarterly run rate of cuts means the Pound is unfazed.

The Bank of England didn't panic in response to last week's soft labour market data, and maintained a steady guidance that it would continue to maintain vigilance over inflation.

The Bank left Bank Rate unchanged at 4.25%; however, three members voted to cut immediately. This points to the prospect of an August interest rate cut, which meets the market's base expectation.

The minutes from the meeting maintained the need for "gradual and careful" consideration when lowering interest rates further. It also maintained that settings should stay "restrictive for sufficiently long".

The language confirms the Bank is still nervous about inflation, which remains well above the 2.0% target, and economists warn it could only peak later this year.

Because the decision and guidance point to an August move in line with the maintenance of a quarterly run rate of cuts, the Pound is unfazed.

"Despite weaker UK growth and employment data recently, there is an element of sticky inflation which is the reason the Bank of England didn’t cut interest rates today. With interest rates above 4.0% consumers remain cautious, especially for those with mortgages. However, when we get below 4.0%, I believe there could be a significant pickup in consumer spending," says Emma Mogford, Fund Manager at Premier Miton Monthly Income Fund.

With the market now back to pricing in two rate cuts this year, the interest rate environment will provide Sterling some stability going forward. The risk is that the data deteriorates further, prompting the market to start pricing in cuts below 3.75%.

Simon Dangoor, Head of Fixed Income Macro strategies at Goldman Sachs Asset Management, says if anything, the Bank will soon start accelerating the pace at which it cuts rates.

"While the recent spike in energy prices and high inflation warrant some caution, the shaky labour market and moderate pay growth suggest that disinflation has further to run. We continue to expect the bank to resume rate cuts in August, followed by a shift to consecutive reductions starting in November, ultimately bringing the bank rate down to 3.25%," he explains.

If correct, this points to a sharp lowering of interest rate expectations in financial markets in the second half of this year.

For the Pound, the adjustment lower spells material weakness.