The monetary policy committee made it clear at its May meeting that it expects to start cutting interest rates at some point this year.
Key to this were the revised inflation forecasts, which showed the Bank of England is increasingly concerned about undershooting, rather than overshooting, the 2 per cent target in the medium term.
The MPC now forecasts the headline rate of inflation, conditioned on market expectations for the path for rates – just two cuts this year and next – falling to 1.9 per cent in Q2 2026 and to 1.5 per cent in Q1 2027.
That is a fairly hefty downward revision from the outlook in February’s report, which showed CPI inflation at 2.2 per cent in Q2 2026 and 1.9 per cent in Q1 2027.
Some of this downward shift, of course, reflects the mechanical impact from the change in the market expected path for rates so far this year. In January, markets expected roughly 100bp of cuts this year and a further 80bp of cuts next. By May’s forecast round that had changed to roughly 45bp this year and 55bp in 2025.
Importantly, though, the BoE also altered some of its underlying assumptions regarding the persistence of inflation.
It now thinks that a greater proportion of the pass through from past increases in import prices has already occurred. And that the second-round effects on wages and domestic prices will taper off from here, whereas it had previously expected a further modest increase in the near term.
Governor Andrew Bailey also provided a clear message at the press conference, stating explicitly that: “It's likely that we will need to cut bank rate over the coming quarters and make monetary policy somewhat less restrictive over the forecast period – possibly more so than currently priced into market rates.”
The big question to us, therefore, is not if but when?
The latest MPC summary provided some clues on this front. Indeed, the addition of the phrase “[it] will consider forthcoming data releases and how these inform the assessment that the risks from inflation persistence are receding” suggested the upcoming data were key.
By default, the latest data are always vital in the decision-making process, so this addition was clearly made to stress the importance of the upcoming data, and in particular, the CPI inflation and labour market releases.
In short, if the data came in broadly in line with the MPC’s expectations, a cut as early as its next meeting in June seemed firmly on the cards.
March labour market data okay, but April’s CPI still too hot
The first hurdle, the March wage data, was cleared – just.
While the headline average weekly earnings ex-bonus measure remained unchanged at 6 per cent, headline growth in private sector average weekly earnings ex-bonus – the BoE’s focus – came in at 5.9 per cent, a smidge below the MPC’s expectation.
