Leading economists have suggested that the Bank of England is unlikely to indicate accelerated interest rate cuts at this Thursday’s meeting, leaving the future of monetary policy uncertain.
Members of the Monetary Policy Committee (MPC) are widely anticipated to agree on a 25 basis point cut in interest rates to four per cent, as reported by City AM.
However, City analysts have proposed that predicting the trajectory of interest rates beyond this point will be more challenging unless the Bank modifies its “gradual and careful” approach to rate reduction.
James Smith, UK economist at ING, stated that policymakers find themselves in an “uncomfortable” position due to a conflicting picture of the UK economy.
Rising inflation to hamper further rate cuts
Inflation unexpectedly rose to 3.6 per cent in the year to June, while the employment market has continued to worsen, with the unemployment rate increasing to 4.7 per cent from 4.4 per cent earlier this year.
Smith suggests these conflicting data points are likely to make MPC members “reluctant to entertain the possibility of faster rate cuts.”
“There’s no smoking gun that might prompt a fundamental rethink in the Bank’s outlook just yet,” he said, noting that services inflation of 4.7 per cent was higher than the Bank’s forecast and likely to cause concern for economists at Threadneedle Street.
“The fact that so many prices are set annually in April means that we’ll have to wait until next spring to see a more material improvement.”
“Until then, [services inflation]’s likely to stay north of four per cent which is an awkward place to be for the Bank.
“Officials are concerned that when inflation reaches these levels, it is more likely to become embedded.”
City experts have indicated that the MPC is positioned for a three-way division, with chief economist Huw Pill expected to vote for interest rates to remain unchanged and two dovish members, Swati Dhingra and Alan Taylor, anticipated to vote against the majority by choosing a 50 basis point reduction.
Self-described “activist” member Catherine Mann’s upcoming decision is also under intense scrutiny, considering she voted for interest rates to remain steady in May when borrowing costs dropped to 4.25 per cent.
In February, she backed a 50 basis point reduction, again opposing the majority stance to lower interest rates by 25 basis points.
Interest rates could be cut once
The division is expected to mirror the MPC’s “finely balanced decision” on reducing rates to four per cent, Deutsche Bank’s Sanjay Raja noted, with hawkish perspectives at the Bank threatening additional interest rate reductions.
Raja has maintained his forecast of three rate reductions over the coming 12 months, whilst markets anticipate interest rates stabilising around 3.5 per cent.
Some experts have proposed interest rates could decline to three per cent.
However, Pantheon Macroeconomics suggested a rate reduction this Thursday might be the final one the Bank implements in its cycle.
