BoE Governor Andrew Bailey

Base rates have been reduced by 25 bps per quarter since August last year to produce a total of 125 bps of rate cuts and a base rate that now stands at 4%. These cuts have coincided with the release of the Bank’s monetary policy report, and the next one of these is due next week. The market, and economists are skeptical that base rates will be cut again largely because inflation has risen. But if actual inflation were the basis for rate cuts, the Bank might not have cut rates at all in the past, given that inflation was around 2% when the Bank started to cut and is now close to 4%. It is not current inflation that concerns the Bank but the outlook for prices and here the Bank seems to have good grounds for thinking that inflation will return to target; indeed, it is very possible that we are at the peak now.

What’s more, actual data on inflation since the last monetary policy report has come through lower than the Bank anticipated, something that should help the doves push for a rate cut next week. Of course, we could be critical that the Bank has been cutting rates when inflation has been above target but that could apply to literally all G10 central banks. Only the Swiss National Bank seems to have inflation comfortably within target and, of course, the Fed cut rates last night despite the fact that inflation is closer to 3% than 2% on the PCE price measure.

In short, when we look at the inflation picture, we think it is hard to see why those that voted for lower rates back in August, on the release of the last monetary policy report, won’t do so again next week. If members felt that the base rate was in the vicinity of the neutral rate, and hence close to the end point of this rate-cut cycle, we might agree with the consensus that rates won’t come down next week. But the Bank’s general view still seems to be that the direction of rates is still down, even if the hawks don’t agree with the speed of the reductions.

We have heard arguments that the Bank could skip a cut next week while signalling that a cut is likely in December. But this is not the way the Bank typically works. The only time such guidance is given is when some sort of shock has happened and it is obvious to everyone that the Bank needs to get rates down quickly. But that’s not the situation now.

What’s more, the vote was so tight back in August, with Governor Bailey having the casting vote, that nobody can possibly tell in advance what the outcome of the December meeting is likely to be. Members won’t say at November’s meeting how they will vote in December. The MPC works differently from the likes of the Fed, where Chair Powell tends to guide the members on future policy, or the ECB, where Chief Economist Lane does this job alongside President Lagarde.

In these cases, there may be reasonable certainty that if Powell and Lagarde have not been able to get a rate change over the line at one meeting, they are likely to do so at the next. But, for the BoE, Steven Barrow, Head of Standard Bank G10 Strategy, doubts that Bailey will know what’s likely to happen from one meeting to the next, except, that is, when a massive shock has occurred, like Covid.

“It would be wise of members to bear in mind the fiscal backdrop, given that the November 26th budget is undoubtedly going to see tax hikes and spending cuts. Clearly the Bank won’t know any specifics here, but when the writing is so clearly on the wall, given what’s already been admitted by Chancellor Reeves, we think it is wise for the Bank to take that on board in its decisions and, if we are right, it might be a factor that just helps tip the balance towards a rate cut next week”, said Steven Barrow.