Many analysts expect the Bank of England (BoE) to cut the base rate by 25 bps today. Photo: BoE Governor Andrew Bailey

Base rate cuts in the UK have been slow and steady. Disagreements amongst Monetary Policy Committee (MPC) members have been high, and that seems part of the reason for the slow progress. The last time, the base rate was reduced in May;there was a three-way split with two members voting for a 50-bps cut, two for no change, while the majority of five wanted base rates to be cut by 25-bps.

Steven Barrow, Head of Standard Bank G10 Strategy thinks it likely that there will be a three-way split again today. Disagreement is quite common; more so than the Federal Reserve, for instance, where last week’s dissent by two Fed Governors raised eyebrows. Dissents are more common at the BoE in part because of the way the MPC is structured relative to the Fed. The Bank has five full-time governors and four external members from the private sector. These external members are essentially tasked with bringing a particular, and often different perspective to avoid groupthink.

The Fed is a bit different. It too has a number of core Board members but also includes four regional Fed presidents who rotate each year. Their perspective is likely to be different from that of the external members in the UK MPC because they are almost bound to largely reflect the information that they are receiving about the district they represent. The same might be said about the national central bank heads that sit on the ECB’s monetary policymaking Governing Council.

Now clearly this can, and does, introduce scope for disagreement at the Fed and ECB, but Steven Barrow's sense is that accusations of groupthink can probably be levied at the Fed – and ECB – more than they can against the BoE. But does this mean that the BoE’s decisions are any better? Perhaps. If we think back to the episode of policy tightening in 2021 and 2022 as inflation surged, the BoE started to hike rates some months before the Fed and ECB, with the former heavily criticised for initially saying that higher inflation was ‘transitory’.

However, if the BoE was more prescient in its analysis of the inflation problem it did not show up in the pound as 2022 was quite a bad year for sterling. Its slide was topped off by a plunge in September as the Bank was forced to rescue the gilt market from the mess created by injudicious government fiscal largesse.

That episode of gilt market panic, although not spurred by BoE policy, might be making some on the MPC reticent to go too hard and fast on monetary easing now. The same members are also aware that the Bank is cutting rates at a time when inflation is rising, not falling. And another argument for caution is that the weakness in the economy is more a function of weak supply, not weak demand; something that can lift inflation still further. The doves, on the other hand, are likely to stress weak demand over weak supply, and we think this is correct.

As the weakness in demand weighs on the labour market so wage growth is likely to fall, and that should create much more room for the Bank to ease. This being said, new public sector wage disputes, primarily in the health sector threaten to throw a spanner in the works of pay awards more generally, or at least in the public sector, if the government acquiesces to wage claims of 20%-plus.

In sum, disagreement on the MPC is likely to be seen at this meeting and will likely continue for some time. However, if we are right that demand deficiency in the economy will come to dominate any concerns about insufficient supply, we should see these disagreements on the MPC ease and members get on with a faster pace of base rate cuts and to reduce rates to levels lower than that implied by money market pricing. Will this upend the pound? Steven Barrow is not so sure. Policy disagreements are a healthy way of getting to the right answer and he doesn’t think that the pound should be punished as a result. There certainly seems more for the US dollar to lose should the Fed become led by a Trump appointee that wants to get rates down at all costs.