"Central Bank Super Week" ushered in the final battle.

On the evening of August 1st, Beijing time, the Bank of England announced that it would cut interest rates by 25 basis points to 5.00%. The Bank of England said that five members of the Monetary Policy Committee (MPC) voted to cut interest rates and four voted to keep interest rates unchanged. This is the first rate cut by the Bank of England since March 2020, which is in line with market expectations.

After the Bank of England announced a rate cut, the market focus turned to the Bank of England’s next rate cut. Traders have increased their bets on the Bank of England’s interest rate cut, which is expected to drop by another 35 basis points in 2024. The money market predicts that the probability of the Bank of England cutting interest rates by 25 basis points in September is about 50%. Some analysts said that it is expected that the Bank of England will cut interest rates next time at the interest rate meeting in November, and it is expected that the interest rate will drop to 4.75% by the end of 2024 and reach 3.75% by the end of 2025.

At present, the Bank of England has a very good reason to cut interest rates. The growth rate of CPI in the UK has dropped from the peak of 11% in 2022 to near the policy target of the Bank of England, which is at a low level among the major developed economies in the world. From May to June, 2024, British inflation stabilized at the Bank of England’s annualized target of 2% for two consecutive months. After the Bank of England announced a 25 basis point interest rate cut, the British Chancellor of the Exchequer Rachel Reeves said that the Bank of England’s interest rate cut was "welcome news".

Britain announced interest rate cuts.

On the evening of August 1st, Beijing time, according to official website, the Bank of England, at the meeting on interest rate that ended on July 31st, 2024, the British Monetary Policy Committee passed a proposal to reduce the bank interest rate by 0.25 percentage point to 5% by a majority of 5: 4.

This is the first rate cut by the Bank of England since March 2020. Since August 2023, the Bank of England has kept the interest rate at an all-time high of 5.25%.

The Bank of England cut interest rates in line with expectations. On the eve of the announcement, traders thought that the probability of the Bank of England cutting interest rates by 25 basis points later today was about 60%.

Andrew Bailey, governor of the Bank of England, said in the monetary policy statement that the easing of inflationary pressure is enough to make the central bank cut interest rates today. But he warned not to cut interest rates "too fast or too much".

Ramsden, deputy governor of the Bank of England, said, "We will pay attention to how banks adjust the interest rates of demand and time deposits after cutting interest rates."

The Bank of England said that the inflation risk will "maintain an upward trend throughout the forecast period" and will pay close attention to the risk of sustained inflation. The policy will remain restrictive "for a long enough time".

The minutes of the meeting showed that the Bank of England may only cut interest rates slowly, and did not specify where the interest rate may stabilize, nor did it specify the speed required to cut interest rates.

The Bank of England is cautious about the future interest rate path, and the minutes of the meeting added that the central bank will "decide the appropriate degree of monetary policy restrictions at each meeting".

In the economic outlook released tonight, the Bank of England predicts that the UK’s GDP will increase by 1.25% in 2024 (predicted by 0.5% in May), 1% in 2025 (predicted by 1% in May) and 1.25% in 2026 (predicted by 1.25% in May).

At the same time, the Bank of England said that according to the market interest rate and model forecast, the inflation rate in Britain is expected to be 2.4% one year later (2.6% in May), 1.7% two years later (1.9% in May) and 1.5% three years later (1.6% in May).

The Bank of England predicts that the unemployment rate in the UK will peak at 4.8% in 2026.

The interest rate cut cycle starts.

After the Bank of England announced the interest rate cut, the exchange rate of the pound against the US dollar fell in a short period, and it is now reported at 1.2781; The yield of 10-year British government bonds fell slightly in the short term, and it is now reported at 3.9615%.

Neil Jones, senior foreign exchange salesman of TJM Europe, said that the outlook of the Bank of England’s monetary policy shows that it is cautious about further interest rate cuts, which should mean that the pound will have a positive tone and the downside is limited.

After the Bank of England announced a rate cut, the market focus turned to the Bank of England’s next rate cut. Traders have increased their bets on the Bank of England’s interest rate cut, which is expected to drop by another 35 basis points in 2024. The money market predicts that the probability of the Bank of England cutting interest rates by 25 basis points in September is about 50%.

Dan Hanson and Ana Andrade, an analyst at Bloomberg Economic, said that the next rate cut by the Bank of England is expected to be at the interest rate meeting in November this year, and it is expected that the interest rate will drop to 4.75% by the end of 2024 and reach 3.75% by the end of 2025.

Julius Bendikas, head of European economic and dynamic asset allocation at Mercer Consulting, said that the Bank of England’s decision to cut interest rates by 25 basis points was surprising, especially considering the accelerated wage growth. It is expected that there will be one or two interest rate cuts in 2024 and more interest rate cuts in 2025. Britain’s economy has normalized, so should interest rates.

It should be pointed out that the interest rate cut in August made the Bank of England ahead of the Federal Reserve in easing policy, but behind the European Central Bank. The European Central Bank cut interest rates for the first time in June. Although it suspended interest rate cuts this month, it said that the space for interest rate cuts in September was "very broad". The Fed is expected to wait until September to cut interest rates.

The confidence of the Bank of England to cut interest rates

At present, the reasons for the Bank of England to cut interest rates are very good. First of all, the growth rate of CPI in the UK has dropped from the peak of 11% in 2022 to near the policy target of the Bank of England, which is at a low level among the major developed economies in the world.

In addition, the Bank of England’s persistently high benchmark interest rate has suppressed British investment, and British businesses hope that the Bank will cut interest rates as soon as possible to reduce the operating costs of enterprises.

Huw Pill, chief economist of the Bank of England, said in July that investors’ attention not only focused on inflation, but also began to pay more attention to broader economic indicators, including salary growth. The data shows that in the first three months of May, the salary growth in the UK slowed down, and the unemployment rate rose to 4.4%, slightly higher than expected.

Sree Kochugovindan, an economist at Abrdn, said that changes in the labor market were enough to push the UK to cut interest rates.

After the Bank of England announced a 25 basis point interest rate cut, Rachel Reeves, the British Chancellor of the Exchequer, said that the Bank of England’s interest rate cut was "welcome news".

The new British Prime Minister Stamer and Chancellor of the Exchequer Reeves, who have been in office for less than a month, have promised to promote British economic growth and improve weak public services. The interest rate cut will help stimulate economic growth, reduce the cost of debt repayment and give the government more funds for priority spending.

However, after the interest rate cut was announced tonight, some analysts suggested not to expect the Bank of England to cut interest rates again next month. Because the Bank of England hinted that it would be cautious in loosening monetary policy, giving officials time to ensure that inflation is firmly contained.

Monica George Michail, an assistant economist at the National Institute for Economic and Social Research, pointed out that although the cooling of the British labor market and inflation remained at the target level, which opened up room for the central bank to cut interest rates, the continuous high wage growth, coupled with the continuous potential inflation, meant that the Bank of England might remain cautious in the next interest rate meeting.

According to the latest data released by the National Bureau of Statistics, from March to May this year, the salary of British employees increased by 5.7% year-on-year, much higher than the inflation level in the same period. Excluding inflation, the real wages of British employees rose by 2.2% during this period, the highest level in the past year.

Andrew Bailey has repeatedly said that he needs to be alert to inflation caused by rising wages. The existing wage increase in Britain has to make the central bank vigilant.

Proofreading: Su Huanwen