Financial markets widely expect an interest rate hold by the Bank of England on June 20 Monetary Policy, but what if they’re wrong?  A surprise cut is likely to have ripple effects across the stock, bond and currency markets.

Futures trading implies the chances of a rate cut next week are around 5%, with August the next likely date for a change in monetary policy. If there is indeed a rate cut this year, it is likeliest to occur on November 7, overnight index swaps currently suggest. 

And next week’s Bank meeting is the last before the upcoming UK general election, which has further aided the case for caution.  

As an institution, the Bank of England is independent of government policy, and has been since 1997. Though its aim is to reduce inflation to its 2% target, it must also be wary of appearing to assist an incumbent government staking its ongoing electoral chances on lower inflation – and cheaper money.

But the Bank of England, despite its recent caution, still has the capacity to surprise the markets, and there is disagreement between traders and economists about next week’s decision.

Markets Have Been Wrong on Rate Cuts Before 

Another reason to be wary of the doves is the BoE’s own history of wrong-footing investors. 

Back in December 2021, when it was making its initial efforts to contain an inflationary surge in the real economy, the MPC voted for a 0.15 percentage point increase in the base rate to 0.25%. 

Markets were not expecting this. At the MPC’s November 2021 meeting, committee members voted against an increase. With the benefit of hindsight, onlookers may now say the BoE was slow off the mark in attacking inflation.

Readers with longer memories may also recall the infamous “unreliable boyfriend” moniker given to former BoE governor Mark Carney – after Labour MP and former Treasury Select Committee member Pat McFadden accused the Canadian financier of giving mixed signals to savers and investors about the Bank’s intentions in 2014. Carney talked over many BoE meetings about the possibility of rate increases, but these never materialised. So-called “forward guidance”, where the Bank signalled its future intentions, was quietly scrapped.

Carney’s successor, Andrew Bailey, has been extremely careful to avoid such accusations. The current mantra for central bankers is “data dependency”, which means that policymakers are reactive to the monthly numbers on inflation, wages, jobs and economic conditions.

Unlike May’s meeting, June 20’s decision will just be accompanied by a brief statement rather than the full monetary policy report and press briefing. So if there is no change to interest rates this week, there will be little guidance on when this is likely to happen.

Alongside the statement, one clue will come from the voting patterns: last month seven members of the monetary policy committee voted to hold, while two voted for a cut. It’s likely that more of the MPC join the cut cohort, but probably not enough to force a decision.

Money markets, as measured by overnight index swaps, suggest that August 1 is still the most likely date for the Bank of England to make its first rate cut since 2020.

August seems more likely from the point of view of the Bank’s calendar; the quarterly monetary policy report and press conference give policymakers more scope to explain decisions.

General Election is Hard to Ignore

The looming election is also a factor. While the Bank is proud of its political neutrality, common sense would lean towards waiting until after the election on July 4 to make a decision on interest rates. Opinion polls suggest a new government will be in power by the time the Bank next meets in August, and that will change the dynamic of economic forecasting, with new tax and spending plans in place.

In recent years, the Bank’s monetary policy and government fiscal policy have notionally worked in tandem. While shadow chancellor Rachel Reeves has ruled out an emergency budget on coming to power, the Labour party is likely to make significant changes to the economy this and next year.

But there is the chance of a surprise cut in June, says Morningstar’s European market strategist Michael Field, with inflation’s fall backing the case.

“Although the majority of economists are predicting the first rate cut in August, that majority is slim. In fact, a recent Reuters poll had more than 40% of economists suggesting this long-awaited rate cut would actually come in June.” 

Does the Data Back a Rate Cut?

In terms of UK economic data, not too much has changed to tip the balance towards a cut. On the side of “hold”, services sector wage growth, a concern of Bank officials, is still high. But May inflation is expected to have hit the 2% target, according to FactSet consensus, in

Money markets assign a roughly 60% probability* to the Bank of England cutting interest rates in June. But with 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.

“The language and tone of today’s statement tells us that either way [the first BoE rate cut] will be sooner rather than later,” said 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

The Bank of England announces its latest interest rate decision on May 9. While it is not expected to change interest rates, investors will be focusing on three key questions that they hope the accompanying report and press conference will answer:

• When will interest rates start to fall in 2024?
• Where does the Bank sees inflation going this year?
• Whether the Bank, like the Federal Reserve, can rule out a rate increase?

We may not get definitive answers to all of these questions but falling inflation and weak economic growth lay a path for the Bank to start preparing to cut interest rates from 5.25%, where they’ve been since August 2023. This hike was the 14th consecutive increase and took rates to a 15-year high. In March, eight members of the MPC voted for no change, and one for a cut. Will more policymakers back the case for monetary easing?

Is the Bank of England Waiting for the Fed?

Because the Bank’s most recent monetary policy meeting was as long ago as March 21, a lot has happened since. There is a sense that the UK now has to get up to speed with the changed expectations for interest rates, which can be summarised as: higher for longer. Until recently, the Federal Reserve was expected to take the lead and start cutting interest rates this spring, with other central banks to follow. But the Fed is now signalling that rate cuts are not on the horizon, but ruled out a rate hike in May 1st’s meeting. The European Central Bank could be the first to cut, at its June meeting, as inflation continues to fall in the eurozone.

While the Bank of England is not co-ordinating with the Fed or ECB, it’s mindful of global trends and domestic issues too. This leaves the Bank’s monetary policy committee in a bind; it could in theory act before the Fed, and our inflation picture is better than in the US, but not by much. We have some of the “stickiness” in inflation that is troubling the Fed policymakers, but our inflation at 3.2% is below that of the US, where the latest CPI reading was 3.5%. The UK economy is weaker than that of the US – as the OECD pointed out this week – so monetary easing could be less problematic and could help stimulate parts of the economy such as