BoE expects closely fought meeting over rate cut

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The Bank of England is heading into a finely balanced decision on whether to lower interest rates again as softer than expected inflation and a weakening labour market prompt some policymakers to argue for lower borrowing costs.

Traders are betting that the BoE’s Monetary Policy Committee, which meets this week, is likely to keep rates on hold at 4 per cent as it attempts to bring inflation back down to the 2 per cent target. Markets imply a less than one-third chance of a quarter-point reduction on Thursday.

But some analysts are predicting a split decision as some rate-setters warn of the risk of holding rates too long in the face of rising unemployment and sluggish GDP growth. The prospect of a tough Budget in November has also added to arguments for easing monetary policy.

The BoE, which has cut interest rates five times since last August, has spent months contending with stubborn price pressures alongside soft growth.

Sarah Breeden, one of the BoE deputy governors, argued in a speech in September that the upsurge in inflation was unlikely to lead to lasting problems for the central bank, and that “holding policy too tight for too long comes with costs to output and employment”. 

“If you go back and read deputy governor Breeden’s recent speech, you have a compelling explanation from a key swing voter on the committee for why the bank should cut,” said Richard Barwell, head of macro research at BNP Paribas Asset Management.

“Add in the recent good news on services inflation and it shouldn’t be a surprise to anyone if the bank does cut, despite what market pricing implies.”

A crucial question heading into the meeting is whether Andrew Bailey, the BoE governor, decides to force through a further quarter-point reduction instead of backing steady policy. It took two rounds of voting in August for the majority of the committee to back a reduction from 4.25 per cent in a five-four decision.

Headline inflation remains high at 3.8 per cent in the UK — well above the 2.2 per cent rate in the Eurozone and the US’s 3 per cent rate.

Megan Greene, one of the external members of the MPC, said last month that workers’ ability to bargain for higher wages had diminished given the weakening labour market, but she still felt the BoE should slow down from the recent once-a-quarter pace of rate reductions given above-target inflation.

However, the latest official data have convinced some economists that the inflation threat is receding, and that the bigger concern is weakening growth. Services inflation was slower in September than the BoE had predicted, and private sector pay growth is cooling alongside unemployment that has risen to 4.8 per cent.

Goldman Sachs analysts, who predict a quarter-point reduction this week, said they expect chancellor Rachel Reeves’ November 26 Budget to deliver a “large, contractionary impulse to the economy”, adding to arguments for lower BoE rates.

They predicted a close, 5-4 vote for a quarter-point cut this week, with Bailey joining deputy governors Breeden and Dave Ramsden, as well as external members Swati Dhingra and Alan Taylor, in advocating for a reduction.

Reeves has been vowing to bear down on inflationary pressures in the Budget, which would also provide some reassurance to the BoE that there won’t be a rerun of the October 2024 Budget, which added to price growth via an increase in employer national insurance contributions.

However, some rate-setters may prefer to wait to see the details of that Budget before deciding how to respond via monetary policy, leading to a reduction instead in December or early next year. 

The meeting will be notable for an overhaul to the way the BoE delivers and communicates its monetary policy decisions. 

A new system unveiled by chief economist Huw Pill last month means the central bank will place less emphasis on its central economic forecast, drawing on a wide array of inputs, including alternative scenarios, as it sets rates. 

In a notable departure, minutes to BoE meetings will now contain a paragraph for each MPC member to lay out their individual thinking.

“We should expect less consensus, more detail and likely more disagreement,” said Rob Wood at Pantheon Macroeconomics.

“Markets need to be prepared, because figuring out the takeaways from the [Monetary Policy Report] will become more complicated than simply looking at how central forecasts change.”