Bank of England poised to cut UK interest rates #UKFinance
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The Bank of England (BoE) is widely expected to reduce interest rates this week, providing a much-needed reprieve for borrowers. However, expectations for a further cut before the end of the year have dwindled in the wake of the autumn budget.
On Thursday, the BoE’s Monetary Policy Committee (MPC) will announce its latest decision, with economists polled by Reuters forecasting a quarter-point reduction in the benchmark rate, bringing it down to 4.75%. This follows the Bank’s first rate cut in over four years, made in August.
However, markets are now less optimistic about the likelihood of another rate reduction before Christmas.
A market survey showed a nearly 90% probability of a rate cut in November, but the likelihood of a second cut in December has dropped significantly. According to Refinitiv data, expectations for a December reduction now stand at 65.2%, down from last week’s 85%.
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The Office for National Statistics (ONS) reported that inflation fell to 1.7% in the year to September, down from 2.2% in August. This marked the first time since April 2021 that inflation had dipped below the BoE’s target, and it came in below market expectations of 1.9%.
Ed Monk, associate director at Fidelity International, said the drop in inflation makes a November rate cut more likely, but added that the real question now is whether borrowers can expect another reduction before the year’s end.
“Ahead of the inflation numbers, the bond market was pricing in three to four quarter-point cuts before the end of next year,” he said. “But that timetable may accelerate if inflation continues to undershoot the Bank of England’s forecast, which is for inflation to tick higher again this year before falling back to target next year.”
Another key factor influencing the BoE’s decision-making is the UK government’s fiscal policy. The autumn budget, which increases government spending by 1.2% of GDP for the coming year, has raised concerns that this additional fiscal stimulus may push inflation higher and limit the scope for further monetary easing.
“The positive data flow over the past month that put consecutive rate cuts on the table for the MPC in November and December has been erased by the budget,” said Robert Wood, chief economist at Pantheon Macroeconomics. Wood pointed out that while inflation has fallen dramatically — from over 11% in late 2022 to below 2% in September — government spending could reignite inflationary pressures, prompting the BoE to slow its rate cuts.
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The Office for Budget Responsibility (OBR), the UK’s fiscal watchdog, echoed these concerns. It suggested that the scale of the fiscal easing could lead to a slower pace of rate cuts in the future, with inflation expected to average 2.5% this year and 2.6% in 2025. The OBR noted that these projections assume the Bank of England responds appropriately to the government’s budgetary plans.
Sanjay Raja, chief UK economist at Deutsche Bank, suggested that the MPC will likely take the budget into account when making its November projections. “Any reaction to the autumn budget will be carefully pored over as part of the November forecast round,” Raja said. “Indeed, the MPC will have had the chance to fully digest the contents of the budget, incorporating it fully into its projections.”
Economists are no longer confident that the BoE will be quick to ease rates further. Thomas Pugh, economist at RSM, expressed caution, stating that Threadneedle Street may be reluctant to signal a rapid pace of rate cuts. “After all, there is a significant split on the committee between doves and hawks, and the budget has changed the outlook for inflation next year,” he said.
Paul Dales, chief economist at Capital Economics, added that while a 25 basis point cut in November appears “nailed on,” he questioned whether the BoE would follow up with another cut in December. “At the moment, though, we think the Bank will keep rates on hold at the meeting,” Dales said, though he still expects rates to eventually fall to 3%, which is lower than the 3.5%-3.75% range currently priced into the market.
“A cut at the final meeting of the year looks fairly 50:50, and a lot will depend on the two inflation reports we get between now and Christmas,” analysts at ING said. “Either way, we still see rates falling below 3.5% by next summer, which is well below what markets are now pricing.”
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The analysts added that the vote on the rate decision will probably be either 6-3 or 7-2 in favour of cutting rates. “There’s a tail risk that Swati Dhingra, the arch-dove on the committee, votes for a 50bp cut at this meeting,” they said.
After this week’s meeting, the Bank’s final monetary policy decision before the end of the year is on 19 December, with the first of 2025 occurring on 6 February.
On Thursday, the Fed’s policymakers, led by chair Jerome Powell, are expected to announce a quarter-point rate cut, bringing the benchmark rate to about 4.6%. This move follows September’s decision to lower rates by half a percentage point. Economists are forecasting another quarter-point cut in December and are speculating that additional reductions could follow next year, depending on how the economic landscape evolves.
However, the road ahead for further rate cuts is becoming less clear. Recent data showing an uptick in underlying price pressures, alongside a potentially volatile reading on the US labour market due on Friday, has raised questions about the Fed’s path forward. The added uncertainty surrounding the outcome of the November 5 US presidential election is also complicating the picture, leaving policymakers with more to consider as they weigh future decisions on interest rates.
Historically, rate cuts have been used to lower borrowing costs for consumers and businesses, stimulating economic activity.
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