Bank of England Rate Decision Preview: A consensus has formed in the market for a 25 basis point rate cut, with internal divisions becoming further apparent.

J.P. Morgan released a research report, stating that the Bank of England is expected to lower interest rates by 25 basis points to 4.0% this Thursday, in line with market expectations. J.P. Morgan indicated that despite internal disagreements, the Bank of England may adhere to a "gradual" interest rate cut guidance. Labor market loosening J.P. Morgan stated that UK businesses have already reacted to the increase in National Insurance (NI) contributions for employers in April. This tax increase policy is essentially a structural supply-side shock: it is expected to raise the natural and overall unemployment rates, as well as have a negative impact on productivity and business costs, even with slowing wage growth. Therefore, the policy's impact on inflation is more complex. While these structural factors exist, the Bank of England is more concerned about the labor market deteriorating too quickly, leading to an excess of idle labor. Current labor market data remains difficult to interpret, and indicators of private sector confidence have not shown clear signs of a shift towards caution. However, there are signs that employment numbers are declining, or at least remaining stagnant. J.P. Morgan predicts that the Bank of England's monthly employment indicators will show a slight shrinkage in the job market. J.P. Morgan also expects the Bank of England to lower its economic growth forecast. Although revisions to the data for the first quarter of 2025 could lead to a slight upward adjustment in expectations for that year, J.P. Morgan anticipates that economic growth rates will decline from the third quarter of 2025 onwards, resulting in a decrease in the growth rate from 1.2% to 1.0% for 2026. J.P. Morgan also anticipates that signs of loosening in the labor market will negatively impact the Bank of England's mid-term inflation forecasts, with the Consumer Price Index forecast being revised down from 1.8% to 1.7%. Internal disagreements emerging J.P. Morgan stated that given the difficult position the Bank of England currently finds itself in, unable to clearly signal an end to the continuous 25-basis point interest rate cuts, the simplest way forward may be to continue using the guidance of "gradual and cautious" interest rate reductions. However, this guidance no longer seems to reflect the actual opinions of the Bank of England's Monetary Policy Committee members. Voting results since May show that three members support accelerating the pace of interest rate cuts (Ding, Taylor, and Ramsden), while two believe the Bank of England should slow down the rate of cuts (Mann and Pill). This suggests that a majority of the nine members of the Monetary Policy Committee wish to take non-gradual measures. Given that policy guidance should truly reflect the views of at least half the Committee members, a change is indeed necessary. One solution could be for the Monetary Policy Committee to continue using the term "gradual" while redefining its meaning. The Committee may indicate that while further policy relaxation is necessary, the "pace of easing will depend on evolving risk balances, including labor market dynamics and the progress of inflation sustainability." With various viewpoints emerging within the Monetary Policy Committee this year, the outcome of this vote is difficult to predict. J.P. Morgan anticipates a similar situation to the previous meeting, with five members advocating for a 25-basis point rate cut, two dovish members calling for a 50-basis point cut (Ding and Taylor), and two hawkish members advocating to keep rates unchanged (Mann and Pill). Quantitative tightening assessment Bank of England Governor Bailey indicated that the staff has completed the annual quantitative tightening (QT) assessment, which is particularly important this year given the volatility in the UK government bond markets. The Bank of England is unlikely to conclude that the market has been negatively impacted by QT, as Bailey recently pointed out that global factors are the main cause of market fluctuations. However, the Bank of England's balance sheet guidance suggests that it will consider market conditions. J.P. Morgan believes this means that the pace of annual QT implementation by the end of this year will slow down from 100 billion to around 75 billion, with a decision expected in September. The Bank of England will not provide specific numbers this week, but J.P. Morgan expects the issue to be discussed, emphasizing sensitivity to market conditions.