Bank of England officials set to clash on interest rates
Bank of England policymakers are set to spar on whether to hold or cut interest rates as City analysts are expecting a three-way split in the final vote.
The Bank saw a 6-3 vote in favour of holding interest rates at 4.25 per cent in June while the meeting before in May saw four dissenting votes, with two voting in favour of cutting interest rates by 50 basis points and another two members calling for a hold.
Top economists at UBS and Barclays believe the Bank’s Monetary Policy Committee (MPC) will once again disagree on whether to cut interest rates given conflicting data points on a weakened labour market and sticky inflation remaining above the two per cent target.
UK analysts at UBS believe two MPC members will oppose an interest rates cut, with the most likely rate-setters opting for a hold to be external member Catherine Mann and chief economist Huw Pill, who both voted for interest rates to be kept at 4.5 per cent in May.
American economist Megan Greene was also picked out as a hawk likely to vote against consensus.
UBS economists said recent data had been “mixed” given inflation had hit 3.6 per cent in the year to June while the number of payrolled employees had continued to slide, pushing unemployment to its highest level in nearly four years.
Given the “upside surprise” in price growth, UBS believes the Bank could revise its inflation expectations upwards for 2025 yet leave longer term forecasts unchanged in its new monetary policy report.
Barclays’ Jack Meaning said Swati Dhingra and Alan Taylor could vote for a bigger cut, following their dovish approach to interest rate decisions in recent meetings as each voted against consensus for a 25 basis point cut in June.
“In a recent speech, Taylor outlined his arguments for an ‘insurance’ cut, front-loading the removal of restriction, as he sees a significant distance to neutral from here,” Meaning said.
“For both Dhingra and Taylor, labour market developments weighed heavily on their deliberations, and we think recent easing will give them the motivation to vote for an outsized 50 basis point move again at this meeting.”
Deputy governor Dave Ramsden, who also voted for a cut in June, is unlikely to look for a bigger cut as he sticks to the Bank’s “gradual and careful” policy mantra, Meaning added.
Bank of England’s uncertain path
Markets have priced in two cuts this year, which would bring interest rates to 3.75 per cent after the final December meeting.
But City analysts have largely disagreed on how far the Bank is willing to go in its rate-cutting cycle.
Most economists, including those at UBS and Capital Economics, believe policymakers will take Bank Rate as far down as three per cent by the end of next year.
But Pantheon Macroeconomics’ Robert Wood and Elliott Jordan-Doak believe an August cut will be a “one-and-done” job due to inflation remaining high and job cuts in the coming months.
“Solid growth momentum as well as sticky wage and price inflation suggest to us a limited case for further interest rate cuts. Elevated inflation expectations support an elevated neutral rate too.
“We think the MPC will have to press pause after one more cut. Six years of near-continuous inflation overshoots cannot be ignored.”