![The Bank of England building in London.](https://media.guim.co.uk/d0b34ea15a3b6fbed4d3df8796ac2c31727d83fc/0_161_3315_1989/1000.jpg)
Closing post
Time for a recap.
City economists are predicting the Bank of England will cut interest rates in August, after leaving borrowing costs unchanged today.
Several analysts believe the BoE will vote to lower rates at its next meeting, in six weeks time, given signs that inflation is easing.
The Bank’s Monetary Policy Committee left base rate unchanged today at 5.25%, in a 7-2 split.
But the seven MPC members who voted for no change were themselves split, with three reportedly in a group whose vote was finally balanced. This may have included BoE governor Andrew Bailey.
🔥 NEW
— Faisal Islam (@faisalislam) June 20, 2024
- Bank of England holds at 5.25%, with a 7-2 vote against a cut
- BUT, decision “finely balanced” for 3 holds, probably including Governor, which mean it was a close run thing not to cut
- Those 3 members playing down sticky services inflation
- August cut very much on
James Lynch, fixed income investment manager at Aegon Asset Management, says:
“It appears the nine-member committee is in three camps. Two voted for cuts again at this meeting, ‘some’ argue that more evidence of diminishing inflation persistence was needed before reducing rates, and for ‘other’ members the recent news did not alter their view on the disinflationary trajectory we are on.
We of course do not know how many is ‘some’ or ‘others’ but given the overall dovishness of the minutes it would appear the ‘some’ might be enough to get the five votes over the line for a cut in August.”
The poud weakened below $1.27 against the dollar, while UK bond prices strengthened, and shares rallied in London.
Andrew Bailey, the Bank’s governor, said:
“It’s good news that inflation has returned to our 2% target. We need to be sure that inflation will stay low and that’s why we’ve decided to hold rates at 5.25% for now.”
Bailey was among seven members of the nine-member MPC who voted to leave rates on hold. Swati Dhingra and Dave Ramsden voted for a quarter-point cut to 5%.
But the Bnak was criticised by the IEA, and the IPPR, for not lowering borrowing costs.
Here’s the full story:
Analysts at Japanese bank Nomura predict the Bank will cut rates in August – when some of the seven policymakers who voted for no change today will have shifted their vote.
They say:
While all of the seven members voting for no change agreed that a) policy was weighing on activity, b) the labour market was loosening and c) inflation persistence was moderating, this group split into two distinct camps this time. One camp (“some” members) continued to worry about high services and wage inflation, second-round effects and strong demand – thereby arguing more evidence was needed to be sure that inflation persistence was abating sufficiently. But another camp (“other” members) was at pains to dismiss recent service and wage inflation strength and argued the June decision was finely balanced.
While we don’t know how many members were in these camps (nor which Ben Broadbent was in – he leaves the Committee at the end of this month), it does suggest that more MPC members believe it will soon be appropriate to begin cutting rates.
Lee Hardman of MUFG says:
BoE leaves policy rate on hold for 7th consecutive meeting at 5.25%.
The updated communication revealed that more MPC members are moving closer to voting in favour of a rate cut.
We are sticking to our forecast for the BoE to begin cutting rates in August.
The pound has weakened modestly but we do not expect a significant reversal of pound outperformance so far this year.
IEA: Bank of England wrong to not cut rates
Criticism is falling on the Bank of England from across the spectrum.
Julian Jessop, economics fellow at the right-wing think tank the Institute of Economic Affairs, has followed the more progressive-leaning IPPR (see earlier) in saying the BoE should have cut borrowing costs.
Jessop says:
“The Bank’s decision to leave interest rates on hold despite inflation falling to target is not unreasonable, but it is still wrong. There is already plenty of evidence that underlying cost pressures are easing. The longer the Bank waits, the greater the risk that inflation undershoots the target while unnecessarily holding back the recovery.
“Most Monetary Policy Committee (MPC) members are not yet confident that pay pressures and services inflation have slowed sufficiently to sound the ‘all clear’. There is a risk that inflation could rise again in the second half of the year.
“It would be unfair to accuse the Bank of political bias. But the view of the markets may have influenced the decision. The MPC could have wanted to avoid the perception of bias if they had surprised investors by cutting rates so close to an election.
“An August rate cut is still very much in play. The statement noted that a new set of forecasts will allow a more detailed assessment of the risks of inflation persisting. Even some MPC members who voted for no change this week acknowledged that their decision was finely balanced.”
Can I suggest anyone rushing to accuse the Bank of England of political bias actually reads the minutes first? 🙄
— Julian Jessop FRSA (@julianHjessop) June 20, 2024
These clearly explain why one month's on-target inflation was not enough to persuade anyone to change their minds, based on economics...
https://t.co/USyvGIViLC
We can’t blame the general election campaign for deterring the Bank of England from cutting interest rates today, suggests Daniel Mahoney, UK economist at Handelsbanken.
Data, not politics, will have determined the Monetary Policy Committee’s decision, Mahoney says:
Even though this decision has taken place during a general election campaigning period, this will not have affected the votes of MPC members.
The MPC have been very clear that their decisions at this and other meetings are data dependent. Given there were clearly a number of rate-setters close to joining the two members backing rate cuts, it would seem that the minutes of June’s MPC meeting are indicating that a rate cut in August remains very much on the cards.
Indeed, we remain of the view that August will mark the start of the rate cutting cycle, although this prediction is contingent on the next set of labour market and inflation data prints not throwing up any surprises.
The Bank of England has disappointed earlier expectations by not starting the rate cutting period today, points out Michael Browne, CIO at Martin Currie.
The UK economy is performing better than expected but not enough to justify restrictive rates. Rate cuts will start in the second half of the year and are likely to continue over a long period of time, as the MPC moves cautiously.
If the UK enters a period of political certainty after the election with higher for longer rates (and a less stable backdrop in Europe), there will be upside risks to UK Sterling. These factors combined would be helpful to lower inflation.
Looking ahead, the Bank of England (BoE) has clearly hinted at a rate cut in August, Browne adds.
Here’s the key points from today’s Bank of England decision, from Modupe Adegbembo
economist at Jefferies:
BoE remained on hold as expected in a ‘finely balanced’ decision. Vote split was 7-2 with Ramsden and Dhingra voting for a cut, and the minutes indicate other members were very close to joining them.
It is clear that the MPC wants to cut and begin dialing back the level of restriction in rates and is happy to look though some of the strength in recent services inflation data, as they believe it is not driven by underlying factors.
Growth has also been relatively resilient and BoE staff now expect GDP growth of 0.5% this year, up from 0.2% forecast in May, but the MPC will be worried that keeping rates on hold may jeopardize this.
We continue to expect a cut from the BoE in August, alongside fresh forecasts and a press conference to allow the Governor to explain the shift in policy. Data will remain important, particularly on services inflation and wages, and the resumption of MPC speeches after the UK election will also be key.
IPPR: Bank should have cut rates to help economy
The Bank of England is being criticised by the Institute for Public Policy Research for leaving interest rates on hold today, and hurting the economy.
Dr George Dibb, associate director for economic policy at IPPR, says:
”The Bank of England has tightened the screws too much for too long, holding back the UK’s economic recovery. It should have followed the European Central Bank by starting to cut rates today.
“The Bank has to balance lingering price rises, notably in services, with the UK’s zero economic growth and a cooling labour market. With inflation expectations back down to pre-pandemic levels, it’s time for the Bank to switch gears, support the economy more, and cut rates.”
BBC: Bank of England governor among 'finely balanced' group
The BBC’s economics editor, Faisal Islam, has some fascinating detail about today’s interest rate decision.
His understanding is that there were three members of the MPC whose decision to vote to hold rates today was ‘finely balanced’ (as the Bank put it earlier).
That would have made a majority, he points out, if they had allied with Swati Dhingra and Dave Ramsden who did vote to lower rates, but were outvoted 7-2.
This means the pathway to a cut on 1 August seems “pretty solid”, Islam says.
Intriguingly, he adds that the group of three waverers “probably includes” Andrew Bailey, the governor of the Bank of England, and “probably” deputy governor Ben Broadbent too.
Broadbent steps down at the end of this month, though, and will be replaced by the OECD’s Clare Lombardelli.
Here’s a video clip with more details:
My take on the Bank of England’s close run decision to hold, pointing to a cut on August 1st…
— Faisal Islam (@faisalislam) June 20, 2024
Taking full advantage of the newly pedestrianised Threadneedle Street… pic.twitter.com/2l7mwFq9Da
Sliding doors moment for the Conservatives - with a lower services inflation print on the day Sunak called the election, he may well have got a rate cut 2 weeks before polling day…
— Faisal Islam (@faisalislam) June 20, 2024
Updated
ING: Bank of England hints that the first rate cut is drawing nearer
It is clear the Bank of England is getting closer to the point of cutting rates, says James Smith, developed markets economist at ING.
He told clients today:
Assuming the next inflation report in mid-July doesn’t contain any nasty surprises, we still think the Bank will vote for a rate cut in August.
Today’s meeting suggests that the BoE is in a similar mindset to the ECB, where it is getting more confident in its inflation forecasting ability and therefore feels able to look through temporary gyrations in underlying CPI data.
Bank officials are heavily constrained in what they can say during the current election campaign. But Governor Andrew Bailey said in May that the Bank may end up cutting rates further than markets were pricing at the time, a rare signal aimed at investors. Watch out for any speeches getting put into the calendar just after the UK election on 4 July, where officials like Bailey or his deputy governors/chief economist might look to firm up expectations for a summer cut.
Ocado shares slide after Vancouver warehouse put on hold
Away from the Bank of England, shares in Ocado have dived over 10% after the company said that its Canadian supermarket partner Sobeys had paused plans to expand its online shopping business with the British firm.
Only a few weeks after being dumped from the FTSE 100, Ocado told the City that Empire Company Limited, owner of Sobeys, is pausing plans to open its fourth online shopping warehouse.
The warehouse, powered by Ocado technology, was set to open in Vancouver next year.
The two companies are also ending a deal under which they promised to exclusively work with each other on online shopping in Canada.
Sobeys currently has three live warehouses using Ocado technology in Toronto, Montreal and Calgary which also supports the retailer serving online customers from almost 100 stores. Ocado said the two companies “have decided for now to focus their joint resources into driving order and sales volumes across the current network.”
Ocado said its expectations for full year sales and profit this year remained unchanged however the latest delay comes amid growing uncertainty over Ocado’s growth potential.
However, the pause with Sobeys is the latest blow to confidence in the company which has reined in expansion plans in the UK as it tries to improve profitability and already seen delays to key projects including a delivery centre for Coles in Australia.
UK government borrowing costs are also dropping, as traders anticipate a cut in interest rates is coming soon.
The yield (or rate of return) on two-year government bonds has fallen, as the price of the debt has risen.
just in: while Bank of England opted not to cut interest rates, its messaging was interpreted as dovish by markets.
— Jack Farley (@JackFarley96) June 20, 2024
December 2024 3-Month sterling SONIA rate rallied ~7 basis points from 4.73% to 4.66%
2-year gilt rallied fro 4.188% => 4.136% pic.twitter.com/ISDerkwcG1
That shows that investors are prepared to accept a lower interest rate for holding UK debt – indicating they expect rate cuts soon.
Updated
Pound falls as City braces for August rate cut
Sterling is weakening on the foreign exchange markets, as traders anticipate that the Bank of England may cut interest rates in August.
The revelation that today’s decision to hold rates was “finely balanced” has knocked the pound, which has lost a third of a cent to $1.268 against the US dollar.
The market reaction has been “swift”, says Kathleen Brooks, research director at XTB, as the City has taken today’s news as “a step in the direction of a rate cut at the next BOE meeting”.
The money markets now suggest there’s a 45% chance of a rate cut in August, versus a 55% chance of no change (this pricing is changing, though!).
Brooks explains:
To sum up, the BOE’s statement and minutes have kept ajar the door for an August rate cut, as they have acknowledged the progress made on inflation to reach the 2% target.
Although they remain committed to inflation returning sustainably to the 2% target rate, they did give some decent excuses for the elevated levels of service price inflation, including prices that are set annually and other indicators that suggest wage growth could ease in the coming months. The market is taking this as a dovish sign, and are increasing their bets for an August rate cut.
Updated
Interestingly, the Bank of England is trying to play down yesterday’s stronger-than-expected service sector inflation rate.
The minutes of this month’s meeting point out that some components in the services inflation basket only change once a year (so aren’t a good measure of wider inflationary pressures).
The Bank says:
Services consumer price inflation had been 5.7% in May, down from 6.0% in March, but somewhat higher than had been projected in the May Report.
This strength had in part reflected prices that were index-linked or regulated, which were typically changed only annually, and volatile components.
Full story: Bank of England keeps interest rates on hold at 5.25%
The Bank of England has held interest rates at 5.25%, marking the seventh consecutive time the central bank has left the cost of borrowing unchanged.
Dashing Rishi Sunak’s hopes of a pre-election cut in the cost of borrowing, a majority of the Bank’s monetary policy committee (MPC) said they wanted to see further evidence that prices growth would remain subdued.
Financial markets expected the decision, despite a fall in inflation in May to the Bank’s 2% target.
Andrew Bailey, the Bank’s governor, said:
“It’s good news that inflation has returned to our 2% target. We need to be sure that inflation will stay low and that’s why we’ve decided to hold rates at 5.25% for now.”
More here:
Bloomberg’s Lizzy Burden says the August interest rate meeting is ‘live’, after the Bank revealed that today’s decision was finely balanced for some.
AUGUST IS LIVE!
— Lizzy Burden (@lizzzburden) June 20, 2024
The BOE kept rates on hold but said the decision was 'finely balanced'.
Markets reacting dovishly - traders now see an August cut as more likely and are close to pricing two 25bp cuts this year.
£ down, 2y gilt yields lowest since March.https://t.co/lDuxUa0OmZ https://t.co/iVfk1z8eGC
Bank of England holds rates: What the experts say
Reaction to today’s interest rate decision is pouring in.
Dean Turner, chief eurozone and uk economist at UBS Global Wealth Management, says the first interest rate cut is drawing closer…
“Today’s decision to keep interest rates unchanged was widely expected form the Bank of England, but the timing of the first easing is drawing closer. Notwithstanding some ongoing strength in service sector inflation data, as confirmed in yesterday’s release, the broader message is that inflation pressures are fading in the UK – a trend that was acknowledged by policymakers.
To avoid a passive tightening in monetary policy, the Bank will soon have to lower interest rates to keep up with inflation on the way down, as it did on the way up.
The Swiss National Bank’s decision to lower interest rates for a second time this morning (see here) is illustrative of this broader trend, we expect the BoE to join the cutting cycle when they meet in August.”
Thomas Pugh, economist at leading audit, tax and consulting firm RSM UK, reckons the Bank will take the plunge in August, and cut interest rates.
He says:
‘Today’s meeting was essentially a rinse and repeat from May. No change in rates, votes or forward guidance. All the focus is now on August and we think the MPC should cut rates at the next meeting. Whether it will or not depends on the next wage and inflation, particularly services, data showing signs of slowing. Indeed, the fact that for some members who voted to keep rates on hold “the policy decision at this meeting was finely balanced” suggests that it wouldn’t take much of a slowdown in wage growth or services inflation to convince them to vote for a rate cut in August.
“It should come as no surprise that the MPC left interest rates at 5.25% today. A string of hotter-than-expected wage and services inflation data had already significantly reduced the chance of a rate cut and the calling of the election for just two weeks’ time was the final nail in the rate cut coffin.
“Admittedly, the MPC is politically independent, so the timing of the election shouldn’t make a difference. But it will have been loath to introduce volatility into financial markets ahead of the election and with financial markets pricing in just a 2.5% chance of a rate cut today, a change would have spooked markets. What’s more, given the blackout in comms around the election any change in guidance would have to meet a higher bar.
“The focus will now turn to the meeting on 1 August, where we think the BoE should follow the ECB, BoC and SNB and start cutting rates.
Kyle Chapman, FX markets analyst at Ballinger Group, says today’s statement from the BoE is ‘more dovish’ than expected, which could mean interest rates will be cut sooner, or faster, than expected:
Naturally, the statement has put a heavy emphasis on the services inflation and labour market data over the coming months. Overall, the key takeaway is that the recent upside surprises in the services component is being interpreted as a blip due to one-off factors. This aligns with our call that a clearer downward trajectory should emerge over the summer, and that makes a first cut in August or September likely, conditional on the data cooperating in the meantime.
Policymakers will likely be glad of the excuse not to rock the boat with a rate cut ahead of the July election, although Rishi Sunak would have enjoyed the rhetorical boost to his party’s economic campaigning. The statement is overall more dovish than expected, however, and the now higher market-implied prospects of incoming rate cuts will be constructive for mortgage holders.
But….Suren Thiru, ICAEW economics director, says an August cut is ‘far from certain’:
“With inflation back at target, the decision to keep interest rates on hold will provide obvious disappointment to those household and business borrowers struggling under the strain of the cumulative impact of 14 rate hikes.
“While the minutes struck a slightly more dovish tone, the lack of movement in the vote split towards loosening policy means an August interest rate cut is far from certain.
“Given that the UK has moved onto a milder inflationary trajectory, rate setters remain too circumspect over the likelihood of loosening policy, risking unnecessarily impeding the UK’s growth prospects.
“With loosening labour market conditions likely to help ease concerns over underlying price pressures, the case for an August interest rate cut remains strong.”
Updated
The Monetary Policy Committee voted by a majority of 7-2 to maintain #BankRate at 5.25%.
— Bank of England (@bankofengland) June 20, 2024
Find out more: https://t.co/1nN6lt3Feu pic.twitter.com/QfcBpmvXyT
BoE: We'll keep reviewing how long to keep rates high
The Bank of England adds that it will “keep under review” how long to keep interest rates at their current level of 5.25%.
It points out that the next decision, at the start of August, will be accompanied by new Bank forecasts for inflation.
It says:
The MPC [Monetary Policy Committee] remained prepared to adjust monetary policy as warranted by economic data to return inflation to the 2% target sustainably. It would therefore continue to monitor closely indications of persistent inflationary pressures and resilience in the economy as a whole, including a range of measures of the underlying tightness of labour market conditions, wage growth and services price inflation.
As part of the August forecast round, members of the Committee would consider all of the information available and how this affected the assessment that the risks from inflation persistence were receding. On that basis, the Committee would keep under review for how long Bank Rate should be maintained at its current level.
BoE raises Q2 growth forecast
The Bank of England has raised its growth forecast for the UK in the second quarter of this year.
The Bank’s staff now expect GDP growth of 0.5% in the second quarter of 2024, stronger than the 0.2% rate predicted in May.
That could cheer Rishi Sunak, who has been claiming for weeks that the economy has turned the corner, cushioning the disappointment that interest rates weren’t cut today.
The upgrade comes after April’s GDP was stronger than the Bank expected, even though the economy didn’t actually grow that month.
The Bank says:
UK GDP appears to have grown more strongly than expected during the first half of this year.
Business surveys, however, remain consistent with a slower pace of underlying growth, of around ¼% per quarter.
Decision not to cut rates was 'close run thing'
Intriguingly, there appears to be a split among the seven Bank of England policymakers who voted to leave interest rates on hold today.
The minutes of this month’s meeting show that some of these seven members were “finely balanced” between voting for a hold, or a cut.
That means the decision not to cut interest rates today was a “close run thing”, reports the BBC’s Faisal Islam.
🔥 NEW
— Faisal Islam (@faisalislam) June 20, 2024
- Bank of England holds at 5.25%, with a 7-2 vote against a cut
- BUT, decision “finely balanced” for 3 holds, probably including Governor, which mean it was a close run thing not to cut
- Those 3 members playing down sticky services inflation
- August cut very much on
The Bank’s minutes explain that there was “a range of views” among the seven members who voted to hold rates today (outvoting the two who wanted a cut).
For some members within this group, the return of headline inflation to 2%, while welcome, was not necessarily indicative of the required sustained return to target. Continued high levels of, and upside news to, services inflation supported the view that second-round effects would maintain persistent upward pressure on underlying inflation. Wage growth had continued to exceed model-based estimates. Indicators of domestic demand were stronger than had been expected, and the risks to the outlook for activity were skewed to the upside. For these members, more evidence of diminishing inflation persistence was needed before reducing the degree of monetary policy restrictiveness.
For other members within this group, the upside news in services price inflation relative to the May Report did not alter significantly the disinflationary trajectory that the economy was on. This view was supported by evidence that the recent strength in services inflation included regulated and indexed components of the basket, and volatile components. The impact of the increase in the NLW [National Living Wage]. this April on aggregate pay growth was unlikely to be as large in future. Such factors would not push up medium-term inflation. For these members, the policy decision at this meeting was finely balanced.
Updated
BoE: Inflation expected to rise slightly later this year
The Bank of England warns that it expects the UK’s inflation rate to rise through this year.
That’s because the falls in energy prices in the second half of 2023 will fall out of the inflation data.
In the minutes of today’s meeting, it says:
Twelve-month CPI inflation fell to 2.0% in May from 3.2% in March, close to the May Monetary Policy Report projection. Indicators of short-term inflation expectations have also continued to moderate, particularly for households.
CPI inflation is expected to rise slightly in the second half of this year, as declines in energy prices last year fall out of the annual comparison.
Bank split 7-2 on rate decision
Once again, the Bank of England’s policymakers were split over today’s interest rate decision.
Two policymakers – Swati Dhingra and Dave Ramsden – again voted to cut rates to 5%.
But they were outvoted by the rest of the committee (see earlier post for the breakdown of the MPC) who voted to leave rates at 5.25%.
Updated
BANK OF ENGLAND DECISION
Newsflash: The Bank of England has left UK interest rates on hold, despite inflation falling to its target yesterday.
The Bank’s monetary policy committee has voted to maintain base rate at 5.25%, a 16-year high.
Policymakers were not swayed by May’s inflation data, which showing price rises slowed to its 2% target last month.
This is the seventh time in a row that the BoE has left the cost of borrowing unchanged, since it raised rates to 5.25% last August, to fight inflation.
The pound is holding steady against the US dollar as we await the Bank of England decision at noon, at just over $1.27.
Pound holds steady ahead of Bank of England rate decision - Reuters https://t.co/ihpgrSml5n
— Jon Turner (@jat992199) June 20, 2024
Updated
The hawks and doves making today's interest rate decision
Today’s UK interest rate decision will be taken by the nine members of the Bank of England’s monetary policy committee – made up of five senior Bank staff, and four external experts.
They can be neatly divided into hawks (who favour tighter monetary policy) and doves (who would like borrowing costs to be lower).
The most dovish member is economics professor Swati Dhingra, who voted for interest rate cuts at the previous three meetings. Originally a lone voice, she was joined by deputy Bank governor Dave Ramsden last month.
The most hawkish MPC members, arguably, are the other three external members - Catherine Mann, Jonathan Haskel and Megan Greene. They all voted to raise interest rates even higher last year (but were outvoted).
The other four – governor Andrew Bailey, deputy governors Ben Broadbent and Sarah Breeden, and chief economist Huw Pill, are gathered in the middle.
Investors and analysts expect the Bank of England to leave the benchmark rate unchanged at a 16-year high #GBP #USDJPY #fx #ドル円https://t.co/pwfXOM9I9C @economicsより pic.twitter.com/CJGwzgawzZ
— わがままRYO@元生主 (@booa2ch) June 20, 2024
Tension is building in the City of London, with less than an hour to wait until the Bank of England announces its interest rate decision.
The money markets are indicating that the BoE will leave rates on hold – ‘no change’ is now a 99.9% possibility, according to the very latest market pricing.
Achilleas Georgolopoulos, investment analyst, says:
With the general elections just two weeks away, BoE members’ public appearances have been kept to a minimum lately to avoid criticism of intervening in the elections. Consequently, both the monetary policy statement and the voting pattern – 2 members voted for a rate cut in May – are unlikely to show major changes. Additionally, the BoE is probably lucky enough that a press conference has not been scheduled for today.
Despite this lack of public communication, the BoE has not gone into hibernation and is preparing for the key August 1 gathering. The meeting will include both the quarterly projections and a press conference to explain any likely rate change or prepare the ground for a move in September. Interestingly, most market economists appear convinced that a 25bps rate cut will be announced in August.
UK tax gap rises to almost £40bn
Just in: Britain’s tax gap – the amount of tax that should have been paid, but wasn’t – has swelled again.
New data from HMRC shows that the tax gap rose to £39.8bn in the 2022-23 financial year, up from £38.1bn in 2021-22.
The percentage tax gap fell, to 4.8% from 5.2%.
The HMRC estimates that the tax gap in corporation tax paid by small businesses was over 32%, with almost £11bn of revenues lost.
The total corporation tax gap was 13.9%, or £13.7bn.
HRMC says:
the tax gap for VAT reduced from 13.7% in 2005 to 2006 to 4.9% in 2022 to 2023
the tax gap for Income Tax, National Insurance contributions (NICs) and Capital Gains Tax gap reduced from 4.5% in 2005 to 2006 to 3.0% in 2022 to 2023
the tax gap for Corporation Tax increased from 11.4% in 2005 to 2006 to 13.9% in 2022 to 2023
the tax gap for excise duties reduced from 8.3% in 2005 to 2006 to 4.7% in 2022 to 2023
Both Labour and the Conservatives have pledged to tackle tax avoidance if they win the next election, to fund spending commitments.
The Bank of England is likely to exercise caution ahead of the general election on 4 July, suggests Laura Suter, director of personal finance at AJ Bell:
“It’s highly likely the Bank will want to wait to see the outcome of the election and the final economic plans before making that first cut.
“With no meeting in July, that means all eyes are now firmly on the August MPC meeting for our first potential cut to rates.”
None of the 65 economists in a Reuters poll last week said they expected the BoE to cut interest rates today.
So it would be a shock if the BoE chose to lower Bank rate to 5% at midday.
Joshua Mahony, chief market analyst at Scope Markets, says pacy service sector inflation will worry the Bank:
Looking ahead, the Bank of England provide the main event of note for European traders, with the MPC having to weigh up just how long they wish to hold off before pulling the trigger.
With inflation back down to the 2% target, the justification for keeping rates at a restrictive sixteen-year high of 5.25% will be questioned by many.
Nonetheless, the fact that UK services inflation remains at a lofty 5.7% will not be lost on BoE members, with core inflation remaining well above target at 3.5%. Despite yesterday’s drop down to 2% for UK inflation, markets have in fact largely written off a rate cut today, instead looking for the first move to come in September.
Updated
Analysts: don't expect a UK rate cut today
The Bank of England may not be convinced that inflation will stick sustainably at its 2% target this year, explains Lindsay James, investment strategist at Quilter Investors:
The Bank of England is highly likely to keep rates unchanged at today’s MPC meeting, in response to two sets of inflation prints that have been published since the previous meeting, both of which showed month-on-month inflation figures which remain much higher than needed for inflation to remain at 2%.
Similarly, with wages still growing in the region of 6%, as they play catch up with a rising price level, services inflation is going to be slow to come down from its current level of 5.7%, feeding through to a core inflation rate of 3.5%, again well above the target level. Ultimately, in a mildly improving economic environment with consumer confidence now picking up from low levels, the central scenario looks likely to be that inflation drifts higher through the remainder of the year.
With the Bank of England having previously emphasised the requirement for inflation to return to 2% sustainably, the evidence is not yet there that it has done that, and may not be for some months yet.
That makes the likelihood of a rate cut this summer increasingly low, something already recognised by the market which prices in the first rate cut only by November.
Marc Ostwald, chief economist and global strategist at ADM Investor Services says the Bank of England is ‘severely constrained’ by the election campaign:
The MPC meeting is severely constrained by the general election campaign, per se the vote is likely to remain 7-2 in favour of holding rates at 5.25%, and the statement likely little changed, with particular emphasis placed on incoming data in terms of the rates outlook.
The MPC may well be quite relieved that it is constrained at this meeting, with the run of recent data proving rather mixed in terms of the inflation, wage and growth outlooks. There will be particular attention given to the minutes, given that the BoE has been on ‘radio silence’ since the election was called.
#BoE #MPC meeting is severely constrained by the #GeneralElection campaign, per se the vote is likely to remain 7-2 in favour of holding #rates at 5.25%https://t.co/fMy44m3kjQ#NorgesBank #PhillyFed #JoblessClaims pic.twitter.com/z1RojvLZQG
— ADM Investor Services International Limited (@ADMISI_Ltd) June 20, 2024
BoE risks keeping rates too high for too long
Back in early May, Bank of England governor Andrew Bailey indicated that a rate cut could come today, telling reporters that “a change in bank rate in June is neither ruled out nor a fait accompli.”
But investors lost confidence in a June rate cut on 22 May, when service sector inflation was clocked higher than expected, and Rishi Sunak called the general election.
The Bank of England has been keeping quiet since the campaign began, to avoid the appearance of political interference, which has made it harder for economists to gauge the Bank’s thinking.
Neil Wilson, analyst at Markets.com, fears the Bank may delay cutting interest rates for too long, saying:
Why not cut now? Wage growth is still strong at around 6%, services inflation at 5.7% - there are reasons to be cautious. But the labour market is softening - unemployment unexpectedly jumped to a two-year high 4.4%, the biggest monthly jump since the GFC, outside of the Covid era. And there is an election coming.
I think the BoE could surprise with a cut today, but an election two weeks away means this is not likely. What it should do and what it will likely do are not necessarily the same thing. My worry is that the BoE stays too high for too long because it is looking at the lagging wage data rather than the weakening labour market. I fail to see any reason for the Bank to be holding off any longer – time to take a leaf out of the ECB playbook and trim some of the restriction.
Short-term UK mortgage rates have dipped slightly today.
Data provided Moneyfacts reports that the average 2-year fixed residential mortgage rate has dropped to 5.96%, down from 5.97% yesterday.
The average 5-year fixed residential mortgage rate today is unchanged, at 5.53%.
Yesterday NatWest announced it was cutting its fixed-rate deals today, by up to 0.17 percentage points.
First out of the big lender gates is NatWest who plan to cut up to 0.17% for those remortgagers opting for a five-year fix on Thurs making their leading rate 4.41pc. @JoeWright026 https://t.co/K9vtTgT6rj
— Emma Fildes (@emmafildes) June 19, 2024
The Bank of England is likely to cut interest rates in August, rather than today, predicts Barret Kupelian, chief economist at PwC:
“With headline inflation hitting its target rate, the Bank’s Monetary Policy Committee is nudging closer to cut its policy rate. The tide is clearly turning, but we still feel that the Bank is not quite there yet.
Services inflation continues to remain significantly above its own projections (5.7% vs 5.3%), in part due to a tight labour market and also because of erratic factors.
“The Bank is therefore likely to keep interest rates unchanged today.
“The Monetary Policy Committee will next meet in August, armed with a new set of forecasts and an additional inflation reading, which will help clarify its thinking on how to proceed. Assuming no surprises, we think the Bank will cut rates in August.”
No change in Norway
More central bank action in Norway… but this time, there’s no change.
Norges Bank has decided to leave its policy rate unchanged at 4.5%, citing concerns about inflation.
Norges Bank says high interest rates have cooled the economy, slowing growth and inflation, but prices are still rising faster than its target.
It adds:
Based on the Committee’s current assessment of the outlook and balance of risks, the policy rate will likely be kept at that level for some time ahead.
*NORGES BANK SEES TIGHT POLICY STANCE `FOR SOMEWHAT LONGER'
— ©️redit From Ⓜ️acro to Ⓜ️icro 🇺🇦 (@Credit_Junk) June 20, 2024
NORGES BANK CONCERNED INFLATION COULD REMAIN ABOVE TARGET pic.twitter.com/efXBhb6xD1
Updated
Switzerland cuts interest rates
Newsflash: Interest rates have been cut….. in Switzerland.
The Swiss National Bank has decided to cut its key interest rates from 1.5% to 1.25%, at its monetary policy meeting today.
The SNB says that underlying inflationary pressures have decreased, meaning it can maintain appropriate monetary conditions with lower interest rates.
It explains:
Inflation has risen slightly since the last monetary policy assessment, and stood at 1.4% in May.
Higher inflation in rents, tourism services and oil products has contributed in particular to this increase. Overall, inflation in Switzerland is currently being driven above all by higher prices for domestic services.
The decision has knocked the Swiss franc:
⚠️ SWISS FRANC FALLS AFTER SNB CUTS RATES, DOLLAR/SWISS UP 0.42% AT 0.8815
— PiQ (@PiQSuite) June 20, 2024
**EURO RISES AGAINST SWISS FRANC AFTER SNB DECISION, LAST UP 0.29% AT 0.9531
SNB cuts interest rates. This one was close and there goes the Franc pic.twitter.com/jmjYKNsSuk
— David Ingles (@DavidInglesTV) June 20, 2024
This is the second rate cut by the SNB this year; in March it became the first major central bank to lower borrowing costs in the current cycle.
YouGov shares plunge after profits warning
Ouch! Shares in polling company YouGov have plunged by a third in early trading, after it shocked investors with a profits warning.
YouGov told the City this morning that sales bookings have been lower than anticipated, since it reported its half-year results (for the six months to 31 January) in March.
Growth in the second half of its financial year has been “below expectations”, despite an investment push that was meant to drive activity.
YouGov says:
We continue to see increased demand for our customised research solutions, however, sales in our Data Products division have remained slow and we continue to see declines in fast-turnaround research services. Geographically we have seen challenges in EMEA, particularly in the DACH region.
[The DACH region, in case you were wondering, is Germany, Austria and Switzerland, while EMEA covers, Europe, the Middle East and Africa].
YouGov now expects full-year adjusted operating profits of £41-44m, down from over £48m in 2023.
#YOU @YouGov has warned that post its H1 24 results, despite seeing growth, this has been below expectations - leading to slower sales bookings than hoped. Sales in Data Products have also remained sluggish but Consumer Panel Services is doing well. #warning #salesbookings pic.twitter.com/IUIXt9EcIa
— Equity Development (@equity_research) June 20, 2024
Sainsbury's sells banking arm to NatWest
Elsewhere in the financial sector, Sainsbury’s has sold its banking arm to NatWest.
The deal will give NatWest around one million customer accounts, along with £2.5bn of customer assets (including loans and credt card balances) and £2.6bn of customer deposits.
I say “sold”… but Sainsbury’s Bank are also paying NatWest £125m as part of the deal…
Paul Thwaite, NatWest Group CEO, says:
This transaction is a great opportunity to accelerate the growth of our Retail Banking business at attractive returns, in line with our strategic priorities.
As well as a complementary customer base, the transaction is expected to add scale to our credit card and unsecured personal lending business within existing risk appetite.
Sainsbury’s told the City it expects Sainsbury’s Bank to return it excess capital of at least £250m, which will be redistributed to its shareholders.
Shares in Sainsbury’s have jumped 1.6% in early trading.
It would be a major shock if the Bank of England changed interest rates today.
The money markets currently indicate that ‘no change’ is a 99% chance.
Mohamed El-Erian, chief economic adviser to Allianz, and president of Queens’ College, Cambridge, suspects the Bank of England may be cautious about signalling future interest rate cuts today.
Good morning.
— Mohamed A. El-Erian (@elerianm) June 20, 2024
The @bankofengland’s policy announcement today is widely expected to include no interest rate cut.
The main question is what policymakers signal about the possible future timing of the cut. I suspect this may be quite cautious.#economy #markets #centralbanks
Currently, the money markets expect the first rate cut to come by November, with a second priced in by February 2025.
Updated
The Bank of England decision isn’t the only important event on the calendar today, of course…
As professor Andrew Angus of Cranfield School of Management, reminds us:
“While England football fans will be hoping for a good result on Thursday evening, the Bank of England won’t want to score any own goals earlier in the day. Expect the monetary policy committee to err on the side of caution, keeping interest rates unchanged.
While a good performance from England and Scotland in the Euros could energise the economy, many households are still reeling from stubborn inflationary pressures, meaning interest rates are now unlikely to fall until late summer.”
ING: Three UK rate cuts this year (probably not starting today)
Dutch bank ING predict the first UK interest rate cut will come in August, with a total of three cuts this year.
But having said that, ING’s developed markets economist, James Smith, suggests the markets may be underpricing the chances of a rate cut today.
He explains:
Investors reckon the Bank is highly unlikely to cut interest rates in an election campaign. We wouldn’t be so sure of that.
We don’t expect a rate cut, but markets are under-pricing the chances.
The good news for the Bank is that the issue of rate cuts has avoided becoming politicised in a way that it might do in the US presidential election campaign later this year, even if other areas of BoE policy (related to reserve remuneration) are coming under scrutiny.
Our takeaway from the last meeting in May was that June’s decision would be on a knife-edge, and that calculation probably hasn’t changed as much as markets might think. Governor Andrew Bailey, we felt, sounded like he would have voted for a rate cut in May had his committee been more on board with it. Still, our base case is a pause this month.
Updated
Introduction: Bank of England decision today
Good morning, and welcome to our rolling coverage of business, the financial markets and the world economy.
Rishi Sunak’s hopes of a pre-election interest rate cut are likely to be dashed today, in one of the most politically sensitive monetary policy decisions in years.
The Bank of England will set interest rates at noon, and is widely expected to leave them on hold at 5.25%, a 16-year high.
Yesterday’s fall in inflation, back to the BoE’s 2% target, gives its monetary policy committee (MPC) a good reason to consider cutting rates, to take some of the pressure off borrowers.
However, policymakers will have noted, glumly, that inflation in the services sector is running much hotter, with prices up 5.7% in the last 12 months.
Sanjay Raja, Deutsche Bank’s chief UK economist, says:
While calls for an imminent rate cut will grow, given headline CPI’s descent to 2%, there’s likely to be growing concerns around the stickiness surrounding services inflation.
There may not be unanimity about today’s decision. At the last meeting, in May, two MPC members voted to cut rates, but were out numbered by their seven colleagues who voted for no change.
City economists expect another 7-2 split today, with Swati Dhinga and deputy governor Dave Ramsden expected to again push for a rate cut.
The minutes of this week’s meeting will also be published at midday, giving an insight into the Bank’s views about the health of the economy, and the prospects for growth and inflation.
Conservatives may be disappointed if the Bank leaves rates on hold again today, as some – such as former Cabinet minister Sir Jacob Rees-Mogg – have been calling for rate cuts this year.
An interest rate cut would, arguably, bolster Sunak’s claims that the economy has turned the corner.
But the Bank is likely to be concerned that inflationary pressures could still be lurking in the economy.
Ipek Ozkardeskaya, senior analyst at Swissquote Bank, explains:
First, services inflation remains high – perhaps too high near 6% - to let the BoE cut rates with a peace of mind as services make up around 80% of the British economy.
And second, consumer prices could rapidly rebound if natural gas market tightens as traders rush to replenish their stockpiles before winter.
As such, if the BoE doesn’t announce a rate cut today, it’s not because they don’t want to put their nose into the country’s political affairs with the upcoming general election, but it’s mostly because the underlying inflationary factors are not yet convincing enough to allow them to do so.
It’s a busy day for central bank news, with both Switzerland and Norway also setting interest rates
The agenda
7am BST: European car sales for May
8.30am BST: Swiss National Bank interest rate decision
9am BST: Norwegian interest rate decision
Noon BST: Bank of England interest rate decision
1.30pm BST: US housing starts for May
1.30pm BST: US weekly jobless data
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