Bank of England rate cut is a close call even with inflation on target

LONDON — Inflation in the U.K. may have come in directly on the Bank of England's 2% target in the last two readings, but that still may not have given the central bank enough confidence to reduce interest rates this week.

Market pricing on Wednesday morning suggested a 60% probability of a rate cut at the BOE's Aug. 1 meeting. That is far less conviction than traders had before the European Central Bank enacted its own rate cut at the start of June; while pricing for the U.S. Federal Reserve to cut for the first time in this cycle in September has hit 100%.

One reason for the uncertainty, and relative lack of strong signaling from the BOE, is that the members of its voting Monetary Policy Committee are divided.

The MPC described its decision to hold rates in June as "finely balanced," with some members concerned by wage growth and the elevated rate of services inflation, and others more focused on the broader disinflationary trajectory.

In both May and June, seven MPC members voted to hold, as two voted to cut by 25 basis points. The BOE's statement also spoke of division over the level of data required to support monetary easing.

Headline U.K. inflation spiked higher than in the U.S. and euro zone over the last two years, but has also cooled more quickly.

However, price rises in the nation's dominant services sector remained hot at 5.7% in June, higher than expected in BOE projections. Core inflation, excluding energy, food, alcohol and tobacco, held at 3.5%.

The BOE will also be weighing up the impacts of the recent uptick in U.K. economic growth and gains made by the British pound.

Another factor that hasmuddied the waters for those trying to guess its next move has been the six-week period from May 23 to July 4 in which the