BOE Set to Resume Rate Cuts After Inflation Drop: Decision Guide

7gl)9ldr6{ltop6x44pjj5s)_media_dl_1.png Bloomberg analysis of ONS data

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(Bloomberg) — The Bank of England will likely deliver a pre-Christmas interest-rate cut on Thursday as concerns shift away from inflation and toward the UK’s struggling economy and jobs market.

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Traders and economists expect the central bank to reduce its benchmark rate by a quarter point to 3.75%, the lowest level in almost three years. It will announce the decision at 12 p.m. in London.

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The Monetary Policy Committee is predicted to ease policy for the first time since August after skipping a move in September and November. Governor Andrew Bailey had been expected to cast the deciding vote again, but Wednesday’s sharp drop in inflation raised the prospect of one of the MPC’s four hawks switching sides.

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The path has been cleared to a cut by evidence that UK price pressures are in retreat, while last month’s budget also sought to reduce inflation in the near term. Still, the BOE is edging closer to the end of its cutting cycle with markets only fully pricing in one more reduction if the central bank follows through with a cut on Thursday.

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Vote split

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In November, Bailey sided with the MPC’s hawkish camp, which includes Deputy Governor Clare Lombardelli and Chief Economist Huw Pill. Bailey said he needed to see more evidence of disinflation before he could back another policy easing with the government’s budget also looming.

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Since that meeting, data has pointed to a more benign picture. Inflation has cooled to its weakest in eight months after a sharper-than-expected drop in November, private sector wage growth has eased and the economy has suffered back-to-back monthly contractions. That is expected to be enough to persuade Bailey to align with the four doves at the BOE, which include Deputy Governors Dave Ramsden and Sarah Breeden.

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The decision should still reflect long-running divides on the MPC, with Bloomberg’s survey showing economists expect a 5 to 4 split for a second straight meeting. However, it’s worth bearing in mind that the survey was conducted prior to Wednesday’s surprisingly low inflation reading.

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Either way, markets put the odds of a cut at more than 90% and predict another move by the end of April.

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Guidance

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There is expected to be little change to the MPC’s already cautious guidance on future rate cuts with markets looking for any hints on how much further the BOE will go.

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In November, it maintained language predicting a “gradual” easing in rates if there was progress on bringing down inflation. However, it also stressed that policy is becoming less restrictive as bank rate edges toward neutral — the level at which it neither boosts inflation nor drags it down.

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Economists will be looking for clues on where rates will settle in the nine members’ individual outlooks, which will be published for only the second time.

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Budget impact

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The central bank may provide more details from its early assessment on how Chancellor of the Exchequer Rachel Reeves’ second budget impacts its outlook.