At 19:00 Beijing time on Thursday, June 20, the Bank of England (BoE) announced that it would keep the policy interest rate at 4.25%, in line with market expectations. Despite May data showing a 3.4% increase in prices, significantly above the central bank’s 2% target, three members of the Monetary Policy Committee (MPC) — Dinggra, Ramsden, and Taylor — voted in favor of cutting interest rates. This reflects internal divergence on the current economic situation, with some prioritizing anti-inflation measures and others focusing on maintaining growth.
Key Points
Market Expectations: Traders expect the BoE to cut interest rates by another 50 basis points before the end of the year, with an 80% probability of a rate cut in August.
Future Policy Path: BoE Governor Bailey emphasized that while the current meeting decided to keep interest rates unchanged, future monetary policy will likely follow a gradual decline. Wage growth is expected to slow significantly for the remainder of the year, providing room for further easing.
Global Economic Backdrop: Analysts highlight that global economic conditions, particularly geopolitical tensions in the Middle East, have exacerbated oil price fluctuations, posing additional challenges to the BoE’s decision-making. Zara Knox, a global market analyst at JPMorgan Asset Management, warns that central banks should act cautiously until there are clear signs that cooling in the labor market can effectively curb inflation.
Domestic and International Challenges
Geopolitical Impact: The UK is facing geopolitical and external risks, with the Israel-Iran conflict causing an 8.5% surge in oil prices in a single week. This has directly increased energy bills for British households and business costs.
Inflation Concerns: The BoE is vigilant about oil prices being transmitted to core inflation through the supply chain. Inflation in the service sector (such as the wage-price spiral) and geopolitical risks (the Middle East conflict pushing up oil prices) have exacerbated the uncertainty of inflation falling back.
Economic Slowdown: The job market continues to cool down, with employment decreasing by more than 250,000 after the budget. Wage growth has slowed, and the potential GDP growth rate is weak (the Q2 forecast is only 0.25%), indicating increased downward pressure on the economy.
Policy Outlook
Facing a complex domestic and international environment, the BoE will continue to adjust interest rates in a “gradual and cautious” manner. The market widely predicts that at the upcoming August meeting, the BoE may decide to cut interest rates to address the balance between sluggish economic growth and inflationary pressure. If wages and inflation decline as expected, a “safe-style interest rate cut” may be initiated within the year. However, if data fluctuates, easing measures may need to be postponed. From a longer-term perspective, the BoE’s policy path will rely on improvements in global economic stability, favoring a “small-step, fast-run” interest rate cut strategy over a one-off large-scale easing.
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