Economic context

UK economic growth remains subdued, aligning with a gradual loosening in the labour market as a margin of slack emerges. While domestic and geopolitical risks persist, trade policy uncertainty has marginally decreased.

CPI inflation is expected to peak at around 4% in September but is anticipated to decline towards the 2% target thereafter. The Committee remains vigilant regarding the risks that temporary price increases pose to wage and price-setting processes. Bank staff analysis indicates that the underlying disinflationary trends in price and wage pressures continue, albeit at varying degrees. Recent data shows a further decline in annual private sector regular average weekly earnings (AWE) growth, while CPI inflation has slightly increased, driven by food, energy, and services prices, surpassing expectations from the May report and June meeting. Services inflation continues to moderate, albeit at a slower pace than last year. The monetary policy report discussed the risk of food price inflation and its potential impact on household inflation expectations. However, wage and services price disinflation remain key drivers for CPI to sustainably reach the target.

Policy decision

The MPC delivered a 25 basis point interest rate cut as expected, but the voting dynamics within the MPC captured market attention. Prior to the meeting, most market participants anticipated a three-way voting split (2 for a 50 bps reduction, 5 for a 25 bps reduction, and 2 unchanged). The actual voting split led to a more hawkish interpretation, with a 5-4 vote in favour of a 25 bps cut. The minutes revealed that one committee member voted for a 50 bps cut, but at the Governor's request committee members were restricted to a cut or hold decision to secure a majority. Those favouring policy easing concluded that sufficient progress had been made on underlying disinflation, though they noted the risk of momentum slowing. The four members favouring an unchanged decision highlighted the slowing disinflationary process and the rising risk of second-round inflation effects. The MPC maintained that a gradual and careful approach to removing restrictive policy remains appropriate, though the restrictiveness has decreased as the Bank Rate had been reduced. The future path and pace of easing depend on the extent of continued easing in underlying price pressures.

Conclusion

The unexpected voting split unsurprisingly caught the market's attention, initially causing a knee-jerk reaction with higher front-end rates, though most of the sell-off retraced. Beyond the voting split, the MPC's comments on the reduced restrictiveness of monetary policy led some to question the potential for further rate cuts. While acknowledging the MPC's concerns about second-round inflation effects on expectations and wage negotiations, our focus remains on the economic slack building in the economy as the labour market weakens, supporting the underlying disinflationary process crucial for the MPC. Additionally, the four members who voted to hold are still in favour of future policy loosening, and the risk of further tax hikes could exert additional downward pressure on consumption and wages. Thus, our view on the BoE remains largely unchanged post MPC decision, and continue to believe the BOE will cut the Bank rate below the market’s current 3.5% terminal rate estimate. Given this, we still favour a longer duration bias in our GBP funds and will continue to target fixed rate trades further out on the money market curve where we can lock in rates in excess of the current overnight rate.

For GBP cash investors, the rate cuts imply lower cash yields, but elevated interest rates continue to offer attractive current yields.  We anticipate future central bank actions will be rate cuts, suggesting investors would benefit from a slight extension of duration, although we remain cautious due to heightened market uncertainty and volatility.

The J.P. Morgan Global Liquidity GBP strategies are well positioned following the rate cut, thanks to our strategic decisions to extend our weighted average maturity (WAM), and diversify across instruments and sectors, while maintaining high levels of liquidity.