August interest rate cut on a knife edge after ‘nuanced’ Bank of England survey

"All told the DMP gave a nuanced signal this month," Rob Wood, chief UK economist at Pantheon Macroeconomics said.

Inflationary pressures continued to ease in June, according to a Bank of England survey, but progress may slow in the coming months.

The Bank’s decision maker panel, which surveys CFOs across the country, showed that firms raised prices 3.8 per cent in the year-to-June, down from 4.6 per cent in May and the lowest level since August 2021.

Looking forward, CFOs surveyed by the Bank expect to raise prices 3.6 per cent over the year ahead, down from 3.8 per cent last month and also the lowest level since August 2021.

The Bank uses the difference between firms’ expected and realised price growth to give an indication of how much inflation will slow in the next year. This gap narrowed suggesting that the pace of disinflation will slow, potentially keeping core inflation and services inflation above the target for a few more months.

The survey also showed continuing progress on wage growth. Expected wage growth in June over the following year continued to edge lower to 4.0 per cent, down from 4.1 per cent and the lowest level since the question was asked back in May 2022.

Wages growth is a major concern for the Bank, with policymakers concerned that stubborn wage growth could keep cost pressures elevated in the labour intensive services sector.

“All told the DMP gave a nuanced signal this month,” Rob Wood, chief UK economist at Pantheon Macroeconomics said.

“There is enough in the survey, from falling realised inflation, easing recruitment difficulties and slowing wage growth to support an MPC rate cut. But there are also enough signals to support the case for waiting a little longer to make sure inflation and wage growth are fading as expected,” he said.

Inflation fell to two per cent in May but there are still signs that underlying cost pressures remain elevated, particularly in the services sector.

Although the Bank of England left interest rates on hold last month, the minutes showed the decision was “finely balanced”. Many economists think that the Bank is looking to cut interest rates in August if the data comes in as expected.