Bank of England poised to slash interest rates
The Bank of England is expected to cut interest rates by 25 basis points to their lowest level in nearly two years at a crunch decision next Thursday.
Markets and leading economists have priced in a cut to Bank Rate to 3.75 per cent amid fears activity in the UK economy is stalling and the labour market is softening.
Members on the nine-man Monetary Policy Committee are set to clash on whether to cut interest rates, with Governor Andrew Bailey now seen as the swing voter that could make the final judgment in the final meeting of the year.
A cut at the Bank would follow a call to bring interest rates in the US down to a range of 3.5 per cent to 3.75 per cent, which came despite dissenting votes from three members at the Federal Reserve.
Bank officials will be eagerly waiting to see fresh data early next week that could make policymakers’ minds up, with the Office for National Statistics (ONS) to publish new figures on unemployment and wage growth on Tuesday, as well as inflation for last month on Wednesday.
CPI inflation slowed to 3.6 per cent in the 12 months to October while figures for the month before undershot the Bank’s projection of 4 per cent but stayed well above the 2 per cent target rate.
Unemployment has continued to worsen, with the number of payrolled employees dropping consistently since last year’s Budget, while three-month private sector wage growth has remained higher than the Bank’s comfort rate of around 3 per cent.
Interest rates crunch decision
The ONS also said on Friday that the UK economy contracted for the second consecutive month in October. The services sector, which makes up the largest portion of value added to the country’s output, flatlined as firms held back investment due to caution provoked by Budget speculation.
“For those MPC members that favoured a November cut, concerns over the growth outlook had increased and they were more relaxed about inflation risks,” said Matt Swannell, EY ITEM Club’s economics adviser. “For those who preferred to keep rates on hold, worries about inflation stickiness carried greater weight.
“The data developments since the last meeting are unlikely to have moved the needle for the core members of either camp.”
“Governor Bailey, who is likely to cast the decisive vote, made remarks in the November meeting indicating that further signs of disinflation would be sufficient for him to vote for another cut.
“However, a substantial upside surprise in the inflation data published the day before the December meeting could still knock a Christmas cut off course.”
The Bank is calls from City economists to cut interest rates but Andrew Sentance, a former MPC member, warned questioned the reasoning behind calls for borrowing costs to be slashed.
“Why cut rates when demand is already outstripping supply, leading to persistent above target inflation and a widening trade deficit?” Sentance said in a post on X.
“The Bank of England should be focussed on meeting the 2 per cent inflation target – the MPC remit – not boosting growth, which will raise not lower inflation.”
City analysts will also be looking closely for any hints in the Bank’s meeting on the pace of the Bank’s cuts and whether there is still a belief that interest rates will fall as low as 3.5 per cent early next year.
Deputy governor Clare Lombardelli and external member Catherine Mann suggested last week at a Treasury Select Committee hearing that they did not see the terminal rate being as low as the likes of Dave Ramsden and Alan Taylor.
Lombardelli said: “We have said that we are on a gradual downward path – we have been on this path for some time. My view is that as you approach your turning point off that path and you do not know where it is, you might slow down a bit to anticipate things and find your way a bit more.
“I put weight on policy rates being more stable than perhaps other people might. I think it would be better if we could smoothly approach this point from above, rather than go down and come back up.”