Yesterday turned into quite an interesting day at the Bank of England with several implications for the future. On the surface we got what had been signaled by Governor Andrew Bailey on July 14th.
The Bank of England is ready to make larger cuts to interest rates if the jobs market shows signs of a pronounced slowdown, its governor has said.
In the coded language of central bankers that meant he would be pressing for an interest-rate cut this week. But things did not go smoothly.
21: The Chair invited the Committee to vote on the proposition that:
- Bank Rate should be reduced by 0.25 percentage points, to 4%.
22: Four members voted in favour of the proposition (Andrew Bailey, Sarah Breeden, Swati Dhingra and Dave Ramsden). Four members (Megan Greene, Clare Lombardelli, Catherine L Mann and Huw Pill) preferred to maintain Bank Rate at 4.25%. One member (Alan Taylor) preferred to reduce Bank Rate by 0.5 percentage points, to 3.75%.
At this point the Governor did not have his interest-rate cut with the Ivory Tower inhabited by Professor Alan Taylor so high he did not realise that his vote was redundant. A 4-4 score draw would make for an exciting football match but in central banking it eaves you where you were as in unchanged.
So the Governor played his Joker card.
23: In order to secure a majority decision on Bank Rate, the Chair invited the Committee to vote on whether:
- Bank Rate should be reduced by 0.25 percentage points, to 4%, or Bank Rate should be maintained at 4.25%.
Which even our good Professor was unable to mess up.
One of these members (Alan Taylor), who would otherwise have preferred to reduce Bank Rate by 0.5 percentage points, voted for a 0.25 percentage points reduction rather than maintaining Bank Rate.
So after some twisting and turning the Governor emerged victorious albeit somewhat embarrassed.
On this basis, the MPC voted by a majority of 5–4 to reduce Bank Rate by 0.25 percentage points, to 4%, rather than maintaining it at 4.25%.
In fact Governor Bailey will have been grateful for the way that his predecessor Mark Carney changed the timing of the vote to Wednesday evening as it gave plenty of time for all this to take place. If it had been at 11:15 to 11:30 yesterday then there would have been quite a rush and maybe a delay.
Professor Alan Taylor
There was something really rather remarkable in his viewpoint.
The inflation hump was expected to normalise, being dominated by one-off changes in tax and administered prices, and food inflation in a limited set of items, neither related to demand pressure.
One might reasonably think that after the disaster that ensued for ECB President Christine Lagarde when she used the word “hump” to describe inflation that the soared that central bankers would avoid the word like the plague. But if that advice is in the Bank of England welcome pack our good Professor did not read it.
There was another claim from him.
Wage settlements had fallen to around 3.5% in the first half of 2025 and were expected to fall further in the second half.
Apart from the fact that such a level remains inconsistent with the inflation target the official numbers tell us wage growth is around 5%. Next up is this assertion.
This picture was one of downside risks in coming years, namely: inflation below forecast, and activity weak or an increased risk of recession.
I agree that activity is weak but sadly whilst in an Ivory Tower world that may mean lower inflation the real world also has episodes where inflation is part of the economic weakness. He does not seem to understand how government action is pushing up the price of electricity either.
Energy futures curves were flat.
Here is Kathryn Porter on the latest round of UK wind auctions.
If offshore wind prices above £80-85 /MWh it will not only be more expensive than generating electricity using gas, it will lock in these higher prices for 20 YEARS!! We need to make it clear consumers don’t accept this…. Our appetite is much lower than the £113 /MWh @Ed_Miliband
has decided to accept on our behalf.
Looking Ahead
I will come to the market response in a moment but there were a couple of significant votes against Governor Bailey which drove it. There were not only two internal members resisting the influence of the Governor’s patronage ( no Cake Trolley for them…). But there is the issue of which two. Because it was Chief Economist Huw Pill and Deputy Governor for Monetary Policy Clare Lombardelli who voted for unchanged interest-rates. This is why.
Business and household inflation expectations remained elevated, inflation was expected to peak at 4% and much of the recent near-term upside news in inflation had been driven by highly salient food and energy prices. Firms’ own-price expectations remained more sensitive to upside inflation surprises as well………
A slower loosening of policy would reduce the risk of inflation not meeting the target sustainably.
So those most responsible to setting the monetary policy and forecasts are worried about inflation persisting.So this begs the question as to why Governor Bailey thinks he can overrule them?
Let me move on but before I do give them both some credit for this.
The Rationale
The explanation for the Gang of Four that wanted a 0.25% interest-rate cut immediately hits troubled waters.
There had been sufficient progress in underlying disinflation albeit, for some of these members, with a risk that this momentum could slow.
You do not have to take my word for it because in the same Minutes the view is not of disinflation.
Twelve-month CPI inflation increased to 3.5% in 2025 Q2, owing to developments in energy, food and administered prices……..CPI inflation is forecast to increase slightly further to peak at 4.0% in September.
They operate on a similar basis to the claim by Josef Goebbels that a lie repeated often enough becomes the truth. This is not disinflation and that is why the swerve called “underlying” is employed and as the labour market numbers are in quite a mess due to the failures at the Office for National Statistics they highlight that area.
Pay growth remains elevated, but has declined further recently, and is still expected to slow significantly over the rest of the year.
Next up is a rather bizarre claim for those voting for an interest-rate cut.
Overall, the MPC judges that the upside risks around medium-term inflationary pressures have moved slightly higher since May.
Comment
It is a shame that the mainstream media has rather missed the reality that the authority of the Governor has been weakened by this. Financial markets were on the case however as they downgraded the likelihood of future interest-rate cuts and/or the speed of them. So we saw the UK Pound £ rally above US $1.34 and including this morning has rallied about 0.7% versus the Euro. Next up was the way that the UK bond market weakened and my leading indicator for UK fixed-rate mortgages the five-tear yield went back above 4%, something that Chancellor Rachel Reeves seemed unaware of.
Since the General Election, interest rates have been cut five times and are now at their lowest level for two years – bringing down the cost of mortgages and loans across the UK.
Also I am afraid the Governor was allowed to mislead on this front as well.
BoE’s Gov Bailey: I Do Not Think Higher UK Borrowing Costs Reflect Concern About Boe Focus Or Government Borrowing – There Is No Particular UK Story In The Rise In Bond Yields. ( @LiveSquawk)
The reality is that UK bond yields have risen more than elsewhere and in terms of a specific example our ten-year yield has gone from being below its US equivalent to some 0.33% higher.
