Just last month, the Bank of England (BoE) declared the UK economy to be “weak.” That’s the implication of this assessment, which begs the question of when and if cuts are even warranted. Policymakers are starting to get a sense of the effects of a softening labor market. On top of that, they are signaling considerable caution with monetary policy, meaning a move to ease rates might take a lot longer than many expect.
Recent signs have suggested an increasing softness in the UK labour market, not least its potential repercussions on inflation. The BoE will continue to closely monitor these developments. They know that a further softening jobs outlook might warrant another 1 or 2 rate cuts by yearend. Surging inflationary pressures add another layer of complexity to the equation, presenting a difficult task to policymakers on the ground.
Many believe that the BoE will retrench and cut rates as soon as its next meeting. Even that dramatic potential decision is being cast in doubt. Policymakers are clearly walking a tightrope between fostering continued economic growth and containing inflation, as they should be. They demonstrate zero urgency to accelerate the loosening of policy. That’s a sign they are trying to be conservative in how they’re reading the economic winds.
The BoE’s dovish stance hasn’t stop a growing skepticism for an August rate cut. What’s going on with the economy largely dictates the central bank’s hand. The state of the labor market and inflationary pressures, in particular, are key. Policymakers understand that a somewhat softer job market may well provide cover for gradual rate cuts. They know full well that ongoing inflation may keep them from moving at all.