Market News

BY Mauricio Alencar

The Bank of England is unlikely to signal faster interest rate cuts at this Thursday’s meeting, leading economists have said, leaving the future of monetary policy in the balance.

Monetary Policy Committee (MPC) members are widely expected to agree to cut interest rates by 25 basis points to four per cent.

But City analysts have suggested that the future of interest rates thereafter will be harder to predict unless the Bank alters its “gradual and careful” approach to rate-cutting.

James Smith, UK economist at ING, said policymakers have been left in an “uncomfortable” position given a conflicted picture of the UK economy.

Rising inflation to hamper further rate cuts

Prices rose higher than expected to 3.6 per cent in the year to June, while the jobs market has shown a further deterioration, with the unemployment rate climbing to 4.7 per cent from 4.4 per cent earlier this year.

These clashing data points are likely to make MPC members “reluctant to entertain the possibility of faster rate cuts”, according to Smith.

“There’s no smoking gun that might prompt a fundamental rethink in the Bank’s outlook just yet,” he said, adding that services inflation of 4.7 per cent was higher than the Bank’s forecast and likely to keep economists at Threadneedle Street awake at night.

“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 analysts have suggested that the MPC is poised for a three-way split, with chief economist Huw Pill set to vote for interest rates to be held and two dovish members, Swati Dhingra and Alan Taylor, set to vote against the consensus by opting for a 50 basis point cut.

Self-described “activist” member Catherine Mann’s next move is also being closely watched, given she voted for interest rates to be held in May when borrowing costs fell to 4.25 per cent.

In February, she voted for a 50 basis point cut, also against the majority view to cut interest rates by 25 basis points.

Interest rates could be cut once

The split is likely to reflect the MPC’s “finely balanced decision” on cutting rates to four per cent, Deutsche Bank’s Sanjay Raja said, with hawkish views at the Bank putting further interest rate cuts at risk.

Raja has held his prediction of three rate cuts over the next 12 months, while markets see interest rates settling around 3.5 per cent.

Some analysts have suggested interest rates could fall to three per cent.

But Pantheon Macroeconomics said a rate cut this Thursday could be the last the Bank makes in its cycle.