By Suban Abdulla

LONDON (Reuters)

The Bank of England is set to keep rates on hold next week, adopting its gradual approach to cuts after a reduction in May. Investors will be looking for indications on whether a slowing economy and weaker wage growth could accelerate the pace of easing.

All 60 economists polled by Reuters this month expect the BoE to maintain rates at 4.25% and nearly all anticipate the next quarter-point rate cut in August, with a significant majority predicting a further cut to 3.75% by the end of this year.

> “If the outcome of June’s meeting is largely a foregone conclusion, the path of the market into the August forecast round hinges on the market’s assessment of the risk around alterations to guidance,” said Moyeen Islam, a fixed income strategist at Barclays.

So far, the central bank has taken a “gradual and careful” approach to rate cuts due to persistent inflation pressures and wage growth, reducing rates just four times, or every quarter, since August 2024.

However, BoE policymakers showed increased division in their decision-making during the May meeting, tempering investor expectations for quicker rate cuts amid a backdrop of weaker domestic data, which revived speculation that the central bank would stick to its quarterly pace of cuts.

The Monetary Policy Committee voted 5-4 to lower borrowing costs by 25 basis points to 4.25% from 4.5% in May in its first meeting since U.S. President Donald Trump announced extensive tariffs on trade partners. Decision-making was marked by a three-way split.

Two policymakers, Swati Dhingra and Alan Taylor, advocated for a more significant half-point cut, while chief economist Huw Pill and Catherine Mann unexpectedly voted to maintain rates at 4.5%. Some in the majority who favored a cut acknowledged that the tariff announcements influenced their positions.

Weaker labor market data this week restored expectations that the BoE will maintain a quarterly rate-cutting approach this year despite higher employment taxes and rising labor costs due to the minimum wage increase in April.

April saw a cooling in British regular and private sector wage growth, which, while above 5%, remains above levels the BoE is comfortable with. Additionally, the number of workers on company payrolls in May fell significantly, and the unemployment rate rose to its highest since 2021.

The Office for National Statistics reported that consumer price inflation rose to 3.5% in April from 2.6% in March, mainly due to one-off factors. The ONS later corrected this figure to a CPI rate of 3.4%. Fresh CPI data is expected a day before the BoE’s decision.

Last month, the BoE projected that CPI would peak at 3.5% in the third quarter of this year, with modest economic growth of 1% expected in 2025.

WEAK GROWTH

Financial markets currently anticipate two more quarter-point rate cuts by the BoE, though this projection became slightly less likely after Israel’s military action against Iran raised oil prices.

The BoE’s rate cuts have been more restrained compared to the European Central Bank (ECB), which has reduced its benchmark rate by 2 percentage points since June 2024, including a quarter-point cut last week following inflation’s return to the central bank’s 2% target. The Federal Reserve cut rates three times last year, with expectations for further cuts approaching.

“Borrowing phrasing from the Fed and the ECB suggests that policy is well-positioned, allowing the BoE to remain patient as economic conditions and international politics unfold,” remarked Investec economist Ellie Henderson.

The British economy displayed a sharp slowdown in April, with official data reflecting the most significant contraction since 2023, despite a robust growth of 0.7% in the first quarter of this year.

April’s output was affected by the conclusion of a tax break on house purchases and the initial effects of Trump’s tariffs. British goods exports to the U.S. dropped to their lowest in over three years due to a record 2 billion pounds monthly decline.

Although Britain has reached a preliminary deal with the U.S. aimed at eliminating additional tariffs on aluminum, steel, and cars, the agreement has yet to be executed, leaving a 10% tariff on other goods. Before the deal, the BoE expected the tariffs to reduce British economic output by 0.3% over three years and slightly dampen inflation.

($1 = 0.7388 pounds)