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 | North East Post Weekend Edition |
12:08 PM 1st August 2024
business
Rate Cut Will Provide Relief To Businesses Squeezed By High Cost Of Finance
“Today’s 5-4 vote by the MPC for a rate cut will give some welcome relief to businesses and households squeezed by the high cost of finance. Although key measures of domestic inflation persistence have not come down as much as the Bank would have liked, they are clearly content that sufficient progress has been made to warrant a slight reduction in rates.
“We’re not expecting much more by way of rate cuts this year. The IoD’s economic confidence measure has improved materially over the past 6 months and broader data on the economy points to momentum holding up despite the high level of interest rates. With wage growth and services inflation still high, and headline inflation expected to rise in the coming months, monetary policy is set to stay restrictive for a good while yet.”
“Today’s decision to cut interest rates was on a knife-edge, as illustrated by the narrow majority of the Monetary Policy Committee voting in favour. At best, there is only mixed evidence that inflation persistence has been defeated. While the labour market is loosening and wage growth slowly easing, the unexpected strength in services inflation remains a red flag.
“We still think that today’s meeting marks the start of a rate cutting cycle, but the pace of this is now more uncertain. Several MPC members will be looking for more definitive signs of inflation persistence easing, to be swayed towards reducing rates further. They will also be conscious of continued upside risks to inflation, with economic growth firming and survey measures of manufacturing pricing pressures picking up.”
"The Old Lady of Threadneedle Street has clearly seen enough in recent data to reassure policymakers that the underlying disinflationary trend within the UK economy remains intact, having delivered the first rate cut of the cycle this lunchtime, taking Bank Rate to 5.00%. A cut which, pre-decision, markets had only viewed as a roughly 2-in-3 chance, emphasising the knife-edge nature of the August meeting.
"The vote split also spoke to how close a call the decision proved to be, with Governor Bailey using his casting vote to break a deadlocked MPC, forcing through a rate cut by a 5-4 margin, with four members - including Chief Economist Pill, dissenting in favour of maintaining Bank Rate at a post-GFC high.
"Beyond the immediate rate decision, the MPC's forward guidance points to a relatively slow and steady path of further policy normalisation, with the Committee continuing to flag a need for policy to remain restrictive for "sufficiently long", while also noting how risks to the inflation outlook are skewed to the upside. Governor Bailey also sounded a note of caution over cutting 'too quickly, or by too much', likely disappointing some of the more dovish members of the MPC.
"Looking ahead, a relatively gradual quarterly pace of cuts seems most plausible for the Old Lady, with further normalisation likely to coincide with meetings at which a Monetary Policy Report is published, leaving the base case as just one more cut this year, at the November meeting. Such a pace would be broadly in line with that priced by markets, and that likely to be delivered by other G10 central banks, potentially limiting any prolonged GBP downside on the back of today's decision."
"The Monetary Policy Committee’s decision to cut interest rates to 5% this week was finely balanced but surely correct. The aim should now be to return rates to a neutral level of around 4% by early next year.
"The Bank’s own economic forecasts point the way. Inflation is expected to pick up temporarily in the second half of this year, but then fall back to 1.7% in two years and to 1.5% in three years, even based on market expectations of further rate cuts.
"The economy has been a little stronger than expected, but this is partly based on hopes that falling inflation will be followed by falling rates. The Bank needed to deliver in order to sustain the recovery.
"Even at 5%, interest rates are still high and will therefore continue to bear down on inflation, especially as the Bank is persisting with ‘quantitative tightening’ as well.
"There are still some reasonable concerns about services inflation. But with overall inflation still forecast to fall below the MPC’s 2% target over the medium term, leaving rates on hold would have been more damaging for credibility than a small cut."