• There’s a risk that we draw too much comfort from dip in inflation in April
• Inflation falling to target earlier is good news
• Policy must address any remaining persistence
• Private sector growth is subdued but positive
• The labor market has eased quite significantly
• We should not overinterpret changes to growth outlook in February BoE forecasts
• The latest pay intentions data is good evidence that the disinflation process is intact but not complete
• The latest DMP data on pay and pricing plans are not at entirely comfortable levels

The BoE yesterday surprised with a dovish hold as 4 members dissented for a rate cut versus 2 expected. Moreover, they changed the guidance in the statement from “the bank rate is likely to continue on a gradual downward path” to “the bank rate is likely to be reduced further”. Inflation forecasts were also revised much lower. Lastly, the Agents’ Pay Survey showed wage growth to average 3.4% in 2026 vs 3.5% expected. The market is now pricing 45 bps of easing by year-end with a 49% probability of a rate cut at the upcoming meeting.

BoE’s Pill voted to hold rates steady yesterday. This was his reasoning for keeping interest rates steady:

“I do not see a need to reduce Bank Rate further at this meeting. This follows from distinguishing between the underlying disinflation process, which remains intact but incomplete, and the risks around that process, which shift through time but have on balance been in the direction of slower disinflation than expected a year or eighteen months ago.

In explaining this slowing, I would emphasise the role of structural changes in wage-bargaining and productivity – notwithstanding the conclusions in Box B, where I draw different implications from the careful and important analysis – and a monetary policy stance that has been overly accommodative since the withdrawal of restriction started in August 2024.

While I draw comfort about the medium-term inflation outlook from longer-term market inflation expectations and low-frequency broad money dynamics, I remain concerned that inflationary pressures stemming from an overly rapid withdrawal of policy restriction over the past two years still need to be contained and eliminated. In that light, I continue to favour a cautious withdrawal of policy restriction, guided by longer‑term trends rather than short‑term news.”