THE Bank of England (BOE) is likely to lower interest rates for only the second time this year in a decision that will be overshadowed by the fallout from the UK budget and Donald Trump’s election victory.
Economists and traders expect the central bank to push ahead with a quarter-point cut to its benchmark rate to 4.75 per cent after an unexpectedly fast slowdown in inflation.
However, the path for borrowing costs beyond Thursday’s (Nov 7) meeting has been thrown into doubt by events at home and overseas, causing rate bets to fluctuate on financial markets.
Last week, Chancellor Rachel Reeves announced one of the biggest fiscal loosenings in decades, unveiling a borrowing splurge that is likely to force the BOE to expect higher inflation in the years ahead. The BOE will also be the first of the major central banks to react to Trump’s victory in the US election, a win that threatens to send shockwaves across the global economy through a renewed trade war.
The decision is due to be announced at 12 pm London time and will be followed by a press conference led by governor Andrew Bailey.
Vote split
Economists have predicted that there will be near unanimity on the nine-member Monetary Policy Committee (MPC) in favour of a cut.
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While it was a tight five to four vote for the first rate reduction since the pandemic in August, a Bloomberg survey found economists leaning towards an eight to one majority in favour of an easing this time.
If that vote split transpires, Catherine Mann is expected to be the only hawk opposing a cut after recently warning that the UK central bank may have started loosening policy prematurely. However, over a third of the surveyed economists expect more to join her in voting for no change.
Budget
The first Labour budget in 14 years has dashed hopes of the BOE moving to successive rate cuts and keeping pace with other central banks.
The budget will be incorporated into the BOE’s quarterly update of its growth and inflation forecasts. While inflation undershot its previous projections and came in below target at 1.7 per cent in September, Reeves’ fiscal plans are expected to stoke inflation over the coming years.
A £30 billion (S$51.6 billion) annual boost to borrowing to pay for more public investment and repair public services is expected to prevent the BOE from taking a more aggressive approach to rate cuts. Economists have warned that the budget could lead to rates being as much as 50 basis points higher than they would have been due to the stimulus.
“The fiscal loosening makes it harder for the BOE to accelerate cuts and to keep up with the pace of easing elsewhere,” said Ben Nabarro, chief UK economist at Citigroup.
US election
While it will be too soon for the BOE to incorporate the effect of any fresh trade tensions in its forecasts, Bailey is likely to be grilled on the economic impact of the US election in the press conference.
A scenario where sweeping trade tariffs hit global demand could offset some of the inflation concerns around the UK budget and force the BOE to lower borrowing costs more quickly. Rising bond yields in response to Trump’s victory could also weigh on the economy by tightening financial conditions. On the other hand, Trump’s tariff-raising, tax-cutting policies could fuel inflation, making it harder to ease rates.
Traders put the chance of a BOE cut in December at less than one in four. In total, just three reductions by the end of 2025 are fully priced in, leaving the BOE lagging behind the easing cycles of the European Central Bank and the US Federal Reserve.
Forward guidance
The BOE is unlikely to diverge from language that suggests a cautious approach to easing policy, particularly after the uncertainty thrown up by Trump’s victory.
While Bailey had started to open the door to a quicker pace of rate cuts, he may take a more guarded approach after a week of political tumult.
The MPC could repeat guidance from September that pointed to “a gradual approach to removing policy restraint”.
“We expect the guidance to be unchanged from September, emphasising a gradual and meeting-by-meeting approach as well as the need for policy to remain restrictive,” said Sonali Punhani, chief UK economist at Bank of America. BLOOMBERG
