Bank of England Set to Cut Rates to Two-Year Low

623px5g35yvbj1(0slvnj)[p_media_dl_1.png Office for National Statistics

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(Bloomberg) — The Bank of England is set to cut interest rates to the lowest level in over two years, as its policymakers contend with a slowing economy and a jobs market rattled by higher taxes.

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Markets and economists expect the UK central bank to lower the benchmark rate by 25 basis points to 4%, sticking to its once-a-quarter pace of easing. It will announce the decision at 12 p.m. in London, followed by a press conference led by Governor Andrew Bailey half an hour later.

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The Monetary Policy Committee has maintained a cautious approach to unwinding policy restriction amid a fresh spike in inflation. Updated forecasts are expected to show stronger near-term price pressures than predicted back in May.

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However, concerns over the economy are also mounting after back-to-back contractions over the spring and a hiring slowdown since employers were hit by increases in payroll taxes and the minimum wage in April. Economists expect the MPC to maintain guidance steering traders toward more gradual rate cuts.

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A fifth quarter-point reduction today would take rates to the lowest since March 2023 and see the BOE pull ahead of the Federal Reserve, which has delivered 100 basis points of easing — all of it last year. On July 30, the US central bank held its benchmark rate in a range of 4.25%-4.5%. 

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Vote split

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The BOE decision is likely to expose divisions on the nine-member committee panel once again. 

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Economists surveyed by Bloomberg predict a three-way split with the majority supporting a quarter-point reduction, two backing a bigger half-point cut and two others wanting no change in policy. That would be a repeat of the division three months ago when the MPC last lowered rates.

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Chief economist Huw Pill and external rate-setter Catherine Mann are seen as the most likely to oppose a reduction, as they did in May, while Swati Dhingra and Alan Taylor may vote for a larger half-point cut.

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Guidance

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The MPC is expected to leave in place guidance steering markets toward more “gradual and careful” interest-rate cuts and a meeting-by-meeting approach. 

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However, traders will be watching closely for any hints that rate-setters are considering a slower pace as they edge toward the end of the cutting cycle. Currently markets expect two more reductions by the end of the year, including a move on Thursday, with rates eventually settling at around 3.5% next year.

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“The risks are tilted in a hawkish direction – it’s possible the committee introduces language that suggests it is considering shifting away from its current pace of reducing rates once a quarter,” said Dan Hanson, chief UK economist at Bloomberg Economics. “The implication would be that a November cut is far from a done deal.”

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Growth and inflation

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The BOE may tweak its forecasts after hotter-than-expected inflation since its last projections in May, driven by sharp increases in energy and food prices.