Bank of England cut rates 25 basis points – path still gradual

Today’s 25 basis points rate cut was very much in line with expectations.

Last week’s UK Budget has impacted the Monetary Policy Committee’s (MPC) forecasts. They see the policies announced last week as likely to boost near-term inflation and activity. They continue to put some weight on a scenario where inflation proves stickier than expected and Governor Andrew Bailey said that they still need to see services inflation come down more broadly.

The point was made during the press conference that a gradual approach allows you to acknowledge the uncertainties and update as things become clearer.

They signal that a “gradual approach to removing policy restraint remained appropriate.” It makes sense to expect more rate cuts next year and at a relatively steady pace for now. However, there are plenty of risks to that sort of a profile, not least reflecting the UK economy having a very large budget to digest (for example, the MPC are uncertain how firms will react to the employers National Insurance contributions increase) and the global economy facing a Donald Trump presidency with a potentially significant rise in across-the-board tariffs on trade (with downside implications for global growth). The point was made during the press conference that a gradual approach allows you to acknowledge the uncertainties and update as things become clearer.

The MPC voted 8-1 to cut, reflecting “continued progress in disinflation”, albeit “remaining domestic inflationary pressures were resolving more slowly.”

The MPC’s median inflation forecasts have the Consumer Price Index above 2% in two years’ time, higher than they were previously, using a profile for interest rates with 100bps of rate cuts between now and the end of next year. On the surface, their forecasts points to the risk of a more hawkish profile for rates than that 100bps of cuts (since inflation is above target in two years’ time) – I have more like 75bps pencilled in to my forecasts. However, their inflation profile is falling at that point and is below 2% at the three-year horizon.

The forecasts are based on a particular case for the economy too, but they do outline two others – one of which where “some inflationary persistence might reflect structural shifts in wage and price-setting behaviour.” They will assess incoming data against their three cases/scenarios and remain evasive and uncertain on where they see the neutral rate.

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