The Bank of England’s expected decision to cut interest rates by 25 basis points could be a “closer call” than markets predict, analysts have said.
Markets have all but priced in interest rates falling to 3.75 per cent at the Bank’s next decision in mid-December after a flurry of data points pointed to a continued decline in inflation levels.
But economists at Oxford Economics have warned that the Monetary Policy Committee (MPC)’s decision could be tighter than analysts assume given splits in opinions among policymakers.
Economists Andrew Goodwin and Edward Allenby suggested that there will be a “closer call” given recent surveys have pointed to higher inflation expectations trends than some hawkish members on the MPC might feel comfortable with.
“As has been the case in two of the past three meetings, the decision will come down to which group Governor Andrew Bailey sides with,” they said.
“Bailey’s statement indicated a bias to cut at one of the upcoming meetings, but neither the Budget nor recent data have offered decisive reasons to switch sides so far. This week’s data added to the fog.
The economics consultancy pointed to the Bank of England’s own monthly survey data showing that firms were planning to increase pay at a faster rate than previously while firms still believed price growth would remain above the two per cent target for the next three years.
Fresh price growth data to be published on the day before the Bank’s meeting could be the “decisive factor” on whether borrowing costs are lowered.
“We continue to think that the MPC will cut at one of the next two meetings and favour the December meeting,” Goodwin and Allenby said. “But we are much less confident in that outcome than markets appear to be.”
Hawks to challenge interest rate cut
The last reading for inflation was 3.6 per cent, falling slightly from 3.8 per cent though remaining higher than the Bank’s 2 per cent target.
Hawkish rate-setters including chief economist Huw Pill and external member Catherine Mann have called for interest rates to stay higher for longer to “squeeze out” pressures and ensure price growth falls back to target levels.
Others on the MPC have called for interest rates to be slashed over fears higher borrowing costs were damaging jobs growth.
Rising unemployment rates, which hit a post-pandemic high of five per cent, could also dampen consumer demand and prompt firms to lower prices.
City analysts are split on where interest rates will level off at by the end of 2026, with some analysts at the likes of Capital Economics suggesting it could drop as low as three per cent. Forecasters at KPMG, JP Morgan, HSBC and UBS are also dovish about the path of interest rates.
Economists at Pantheon Macroeconomics meanwhile believe interest rates should be held at four per cent for the foreseeable future.
Markets have assumed that interest rates will fall to 3.5 per cent.