THE Bank of England (BOE) is likely to warn of only gradual interest-rate cuts in 2025, ending the year with a cautious message to investors as the spectre of stagflation – anaemic growth and sticky inflation – hangs over the British economy.
Markets and economists expect the nine-member Monetary Policy Committee (MPC) to keep the benchmark cost of borrowing on hold at 4.75 per cent on Thursday (Dec 19). The UK central bank will announce the decision at noon in London.
BOE governor Andrew Bailey and his colleagues are likely to strike a wary tone given the inflation threats brewing at home and abroad. The risk of a global trade war sparked by Donald Trump returning to the White House and uncertainty over the impact from the UK budget loom large over the outlook.
The BOE cut rates in August and November, and Bailey signalled earlier this month that a once-a-quarter pace was likely to continue. However, traders scaled back bets in recent days after wages rose more than forecast and services inflation stuck at elevated levels. They are now pricing in just two reductions next year, implying policy will continue to drag on an economy that has lost momentum.
Vote split
Economists are expecting an eight-to-one split in favour of keeping rates on hold, with the chances of a surprise reduction seen as near zero.
Swati Dhingra is set to be the lone dove backing another cut, having done so at every meeting since February. If she is joined by anyone, it is likely to be deputy governor Dave Ramsden or Alan Taylor, the BOE’s newest rate-setter. Both have raised the possibility of voting for faster cuts if downside risks to growth and inflation materialise. Tuesday’s surprisingly strong wage growth may persuade them against dissenting this time.
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Guidance
Economists expect the MPC to leave its guidance from the November meeting minutes largely intact, warning investors to expect only “gradual” rate cuts.
It is likely to reiterate a meeting-by-meeting approach and say that policy needs to “remain restrictive for sufficiently long” to stamp out lingering inflationary threats. As investors try to estimate where rates will ultimately settle, the BOE is coming under increasing pressure to reopen the debate on the so-called neutral rate – where monetary policy neither restrains nor stimulates growth. It is showing few signs of wanting to do so.
Investors may find more clues in the comments on the vote split. Previously the minutes have emphasised a wide range of views among the majority, and signalled that some rate-setters were close to backing a cut. That could lay the groundwork for a reduction in February.
“The BOE, we think, has little appetite to deviate from the message of gradual cuts,” said Bruna Skarica, chief UK economist at Morgan Stanley.
Growth and inflation
The BOE may tweak its fourth-quarter growth forecast after a string of disappointing figures. In November, it predicted 0.3 per cent. But a surprise 0.1 per cent fall in GDP in October and bleak warnings in surveys about the impact of budget tax rises suggest the bank is too upbeat. Bloomberg Economics has trimmed its forecast to just 0.2 per cent.
Fears over prices are also building again after data this week revealed the first pickup in wage growth in over a year and inflation at an eight-month high. The central bank may comment on headline and services inflation running ahead of where it had expected only last month.
Scenarios
Traders will also be looking for any hints about which of the BOE’s three inflation scenarios officials see as the most likely.
It has a range of possible outcomes for inflation, ranging from a benign scenario to one where structural changes mean restrictive policy is needed for much longer. The BOE currently bases its forecasts on the middle case, where more slack in the economy needs to be created before rates come down.
Tax increases
The BOE may provide investors more on its thinking on the fallout from Chancellor of the Exchequer Rachel Reeves’ £26 billion (S$44.6 billion) hike in employer national insurance contributions, the centrepiece of the Labour government’s first budget on Oct 30.
Policymakers are unsure how businesses will react, as they could lift prices, cut jobs and hours, restrain pay rises or take a hit to their profit margins. A survey of chief financial officers by the BOE suggested consumers are set to feel the pain hit one way or another.
“The outlook for interest rates next year will heavily depend on how firms respond to the increase in payroll costs imposed in the budget,” said Thomas Pugh, economist at RSM UK. BLOOMBERG
