BOE Set to Refrain From Second Straight Rate Cut ·Bloomberg
Tom Rees
4 min read
(Bloomberg) -- The Bank of England is likely to decide on Thursday against making back-to-back interest-rates cuts, maintaining a patient approach to reversing the most aggressive policy tightening in decades.
Economists and investors expect the Monetary Policy Committee to keep its benchmark rate at 5% after last month voting for the first reduction in over four years. The decision is due to be announced at 12 p.m. London time, a day after the Federal Reserve lowered its benchmark interest rate by a half percentage point.
Governor Andrew Bailey may provide investors more hints that the central bank will cut rates again in November. However, he is likely to resist explicitly endorsing the views of financial markets, which have grown more certain that policymakers will move to a quicker pace of easing.
Vote Split
After last month’s tight 5-4 vote to lower rates from a 16-year high, most economists expect the MPC to revert to a 7-2 split in favor of keeping policy on hold.
Gauges of underlying inflation such as services prices remain higher than the BOE would like. If there are dissenting voices still pushing for a further reduction in borrowing costs, they are most likely to come from the BOE’s more dovish rate-setters, Swati Dhingra and Deputy Governor Dave Ramsden.
One unknown is the arrival of Alan Taylor, who has replaced one of the most hawkish rate-setters Jonathan Haskel. While he has not commented specifically on the UK recently, Taylor’s research has previously warned that tight monetary policy can hamper the economy for over a decade.
Forward Guidance
Economists are expecting little change to guidance that would leave the door open to another cut in November. The BOE said in August that it will take a meeting-by-meeting approach and stressed that policy will “need to continue to remain restrictive for sufficiently long.”
Bailey said at the Jackson Hole conference last month that rate-setters “need to be cautious because the job is not completed.” However, he also signaled growing confidence that second-round inflation effects are “smaller than we expected.”
A cut ahead could be signaled if the minutes say a decision not to reduce rates again was “finely balanced.” This language was used in June ahead of the August decision to begin easing.
“We expect the committee to retain a cautious state of mind, holding rates steady and noting the continued need for monetary restriction,” said Ben Nabarro, chief UK economist at Citigroup.
What Bloomberg Economics Says...
“Our base case is that the BOE cuts once more this year – in November – though we see a risk that the central bank becomes more open to the idea of easing sequentially, with another move down in December.”
-Dan Hanson and Ana Andrade. Click to read the preview on the Terminal
Quantitative Tightening
This month will feature the MPC’s annual decision on the pace of quantitative tightening — the reversal of its vast bond-buying program used to stimulate the economy following the financial crisis.
Over 80% of the 22 economists surveyed by Bloomberg expect it to carry on reducing its balance sheet by ￡100 billion ($132 billion) a year, through a mix of actively selling bonds and stopping reinvestments when the securities mature.
However, some analysts — including at Deutsche Bank, Citigroup and JP Morgan — believe that the central bank could announce a much faster run-off due to an unusually high amount of bond redemptions over the next 12 months. Sticking with ￡100 billion would imply a sharp drop in active gilt sales from ￡50 billion to ￡13 billion.
It comes at a crucial moment for the BOE’s balance sheet management as it attempts to shift from the central bank buying assets in exchange for cash-like reserves to repo operations, where it lends cash to banks against collateral.
Markets
Investors have increased wagers on a faster cutting cycle from the BOE as confidence in the strength of the global economy has waned. On Wednesday, the Fed kicked off its own easing cycle with the first rate cut in more than four years in an aggressive bid to bolster the US labor market.
Traders are now all-but pricing in successive BOE cuts in both November and December after data showing the economy’s recovery stalling and easing pressures from wages. Another four or five cuts are expected next year.
Inflation and Growth Outlook
The BOE may point to a slightly more benign picture on inflation after it undershot its forecasts in July and August.
While the central bank will next do a full round of forecasts in November, it may say that it now expects lower inflation ahead. It had expected price growth of 2.4% by August. Instead, it came in at 2.2%, just above the BOE’s 2% target.
The BOE may also highlight some signs that the recovery from last year’s recession is fizzling out. GDP was unexpectedly flat at the start of the third quarter, meaning the economy has not expanded for three out of the last four reported months. The strong pound, which is trading around its highest level against the dollar since early 2022, risks acting as a further brake on growth by harming British exports.