As a result, even if the prime rate falls below the official 2 percent target in the coming months, as seems likely, it could rise again later in the year.
This is already happening in the Eurozone, where headline inflation, core inflation and inflation in services rose in May. The ECB may have cut rates last week, but markets are less confident it will follow through with more cuts soon.
Second, the outlook for the UK labor market is more uncertain than usual.
This partly reflects doubts about the reliability of the data. But some MPC members will also want more reassurance that persistent labor shortages and a large increase in the National Living Wage in April are not fueling a so-called wage-price spiral.
Third, and more positively, the UK economy is performing better than expected.
Growth was surprisingly strong in the first quarter of the year, and earlier business surveys suggest there is still plenty of positive momentum.
The CBI is the latest body to revise its forecasts for the UK economy, expecting growth of 1 per cent in 2024 and almost 2 per cent in 2025, driven by a recovery in consumer spending.
Fourth, now that the Bank is finally paying more attention to monetary aggregates, it is only fair to admit that broad money growth has accelerated to a three-month annualized pace of around 5%.
This is consistent with decent growth in activity and suggests that the risks of a nasty bout of deflation have passed.
I haven’t mentioned politics yet. Many have argued that Rishi Sunak’s decision to call a general election on July 4 means we should rule out a rate cut at the next MPC meeting on June 20.
I’m not convinced. Some cynics have suggested that the Bank will not want to do the Conservatives any favors by cutting rates ahead of the election, or at least that the MPC will be keen to avoid any perception of bias.
But it works both ways. If there is a clear economic case for cutting interest rates and the MPC still does nothing, the bank could be accused of helping Labor instead.
In fact, there were several occasions when at least one member of the MPC voted to change rates during the election campaign. So it is still possible that two members who are already arguing about the cut will be joined by others.
However, this would need to be justified by new data and market expectations for a June rate cut are now extremely low. Unless this changes dramatically in less than two weeks, most MPC members will be reluctant to spring a surprise so close to the election.
However, whether the first move comes in June or August, there is still a strong case for a rate cut in the summer.
First, the latest inflation news was really reassuring.
Business surveys suggest that retail price growth eased further in May, including food price growth. The PMI survey showed that inflation in services is also slowing. A stronger pound and a further drop in oil prices will also help a bit.
Meanwhile, the labor market continues to cool.
The Bank of England’s own survey of policymakers’ panel found that expectations of wage growth next year fell back to 4.1 percent in May from 4.6 percent in April. No signs of a wage and price spiral.
The starting point is also important. The Bank of England’s official rate of 5.25 percent is well above the level that can be considered “neutral.” It is also higher than in the Eurozone, where the overnight deposit rate is now 3.75%.
British rates could therefore be cut in some way and still affect inflation, especially if the bank continues to sell government bonds quite aggressively as it reverses quantitative easing.
Finally, the recovery in economic activity and confidence is rooted – at least in part – in the hope that falling inflation will allow the Bank to cut interest rates.
The bank’s own staff forecasts see inflation falling to the 2 percent target and staying there or somewhere else, even on market expectations of a series of rate cuts.
If the MPC is not met soon, a longer period of unnecessarily high interest rates could further sink the recovery.
Julian Jessop is an independent economist.