The Bank of England has given a green light on the possibility of an interest rate cut in December following an indication that inflation had reached its peak, with its borrowing costs remaining unchanged prior to the make-or-buy budget of Rachel Reeves.
That is, with less than three weeks ahead of the chancellor’s statement on tax and expenditure, the monetary policy committee (MPC) of the bank voted five-four in favour to maintain the borrowing cost at the same level as in the previous meeting.
Nevertheless, City economists believed that the knife-edge ruling and the new forecasts made by the Bank that inflation would drop to below 3.8% would clear the path for the Bank to reduce rates following the budget.
With the casting vote, the Bank governor Andrew Bailey said that he wished to wait and see whether the inflationary pressures would keep abating and whether the budget presented by Reeves would make a difference.
“Today we had interest rates of 4%. We believe that rates still move in a gradual downward trend, although we should be convinced that before we reduce rates yet again, we have inflation on a downward course back to our 2% target.”
The cost of borrowing has been reduced five times since Labor took office in July 2024, alleviating the burden on businesses and households, and the most recent cut was made in August. In the meantime, the inflation is at 3.8 – nearly two times higher than the 2% of the Bank.
The chancellor, in her 26 November fiscal statement, is set to raise taxes, which may slow the economy, and also take action against the increasing cost of living.
Reeves was pleased by a new outlook of the Bank in which the inflation was backsliding at a rate that was quicker than expected. She said she would make the fair decisions that are required at the budget later that month to establish the solid building blocks upon which our economy can keep reducing waiting lists, reducing national debt, and reducing the cost of living.
Following the vote to hold, which was marginally nearer than the City anticipated, Bailey gave the MPC an opportunity to discuss the budget before it met on 18 December. The vote was followed by a shift in financial markets, showing that there was nearly a 60 percent probability of a quarter-point cut in the rates next month.
Economists opined that tax increments may motivate Threadneedle Street into action. Even weaker demand can be plausible, thus driving inflation down by 2026, according to Janet Mui, the head of market analysis of the wealth manager, RBC Brewin Dolphin.
Only after the budget will we be able to have a clearer picture, and the vote of Governor Bailey will be essential. Altogether, the markets are convinced that the BoE has left the door open to a cut in the rate in December, and this has been priced in by the markets.
Bailey and five others in the MPC voted to maintain the rates at 4%.4 members voted in support of a reduction by a quarter point.
To lament the growing strength of the economy, the Bank indicated that unemployment was set to hit an even greater peak of over 5 percent at the beginning of next year, up 4.8 percent today, with the hiring demand muted.
It claimed that the inflation would most likely reach its peak of 3.8 percent, which was lower than its forecast of 4 percent later in the fall. It predicted that it would drop back to approximately 2.5 percent in the coming year, and then back to its 2 percent target in 2027.
The MPC, in its decision minutes, stated that speculation on the budget of Reeves was likely a contributor to the weakness in the economy over the past couple of months and that households had retained a tight rein on spending in the face of the increased pressure on living costs.
It also discovered weaker exports to the US and the break in Britain’s manufacturing base associated with the Jaguar Land Rover cyber-attack had brought down the output in the third quarter, predicting a lower growth rate of 0.2%.
The Bank predicted that the growth of GDP would decline to 1.2 per cent in 2026 before increasing to 1.6 and 1.8 per cent in 2027 and 2028, respectively.
Nonetheless, there was a warning by policymakers that inflationary pressures would still strain households and businesses. The chief economist of the Bank, Huw Pill, remarked that the UK was experiencing indications that it might be experiencing intrinsic inflation persistence since employees and businesses were adjusting to the prevailing rates of inflation by insisting on higher pay settlements and increasing their prices.
But Bailey warned that the danger of inflation becoming embedded at high levels was reducing as a risk and pointed out that, in case disinflation becomes more firmly established in future, he would vote to cut.
