BoE Holds at 3.75% as Dovish Data Gives Bailey Cover

The labour market is cooling, though the April/May report came in slightly stronger than expected. Employment growth beat forecasts and the unemployment rate undershot. Public sector wage growth rose, reflecting previously agreed NHS staff uplifts, the BoE noted. Vacancies declined and private sector wage growth continued to fall, now at levels consistent with the inflation target. April GDP slipped back into negative territory after a few solid months. The BoE continues to see the loosening labour market and weaker economy containing price pressures.

The meeting does not change the view that Bank Rate will stay on hold for the coming year. Core PPI inflation remains modest. The slowing economy, the cooling labour market, and lower oil prices suggest core price pressures will not exceed the BoE's tolerance. The risk is that businesses' pricing intentions from the PMI survey materialise, which would push inflation higher than the BoE's current path.

Market reaction was muted. Investors price in a full rate hike by year-end. A weaker UK growth outlook and the dovish BoE stance relative to market pricing weigh on the sterling call. EUR/GBP is forecast to move toward 0.89 on a 6-12 month horizon. The next scheduled data point is the July CPI print, due Aug. 16.