Bank expected to cut interest rates for fifth time this year

Times

a day ago

The Bank of England is poised to cut interest rates for the fifth time in a year next week in what is likely to be a tightly contested decision among its officials.
Members of the nine-strong monetary policy committee (MPC), the group that sets the base rate in the UK every six weeks, are expected to vote 5-4 in favour of lowering borrowing costs to 4 per cent from 4.25 per cent on Thursday.
Rates peaked at 5.25 per cent in August 2023 and have gradually fallen since August last year.
A slim majority of five panellists, including Andrew Bailey, the governor of the Bank, are set to back the quarter-point rate reduction. Two members, probably Huw Pill, the Bank's chief economist, and Catherine Mann, an external MPC member, are anticipated to favour leaving rates unchanged. Two other external members, Swati Dhingra and Alan Taylor, may call for a larger 50-basis point downward move.
The MPC is deeply divided over how much emphasis it respectively assigns to inflation, the labour market and economic growth. Members who have favoured a more cautious approach to loosening policy have pointed to higher inflation expectations among consumers and a resurgence in food prices. Those who have backed rate cuts are more concerned about weakness in the labour market and soft pay growth.
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Analysts at Bank of America, the Wall Street investment bank, said: 'The tone of the meeting is likely to strike a delicate balance between the trade-off the BoE is facing of still elevated inflation/inflation expectations and softening growth/pay and labour market.'
In April and May the economy contracted by 0.3 per cent and 0.1 per cent respectively. In the spring the unemployment rate climbed to 4.7 per cent, a four-year high, while payrolled employment has contracted for five months in a row after the £25 billion increase in employers' national insurance contributions.
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However, inflation leapt to an 18-month high of 3.6 per cent in June and Bank of England officials think that the rate will remain above 3 per cent for the remainder of the year. The Bank is required to keep inflation at 2 per cent.
Nomura, a Japanese investment bank, said: 'Policy easing can be justified even without particularly weak data because rates are restrictive. When this justification (of getting policy back to neutral) for lowering rates no longer holds, further cuts should become even more data-dependent.'
Markets think that the MPC will probably lower rates in November and eventually take them down to 3.5 per cent, but Ruth Gregory, deputy chief UK economist at Capital Economics, a consultancy, said that they will settle at 3 per cent. 'It's only a matter of time before the weakness in employment leads to wage growth and inflation falling back to target consistent rates,' she said.
On Thursday the MPC will also publish new economic forecasts for the next three years and update investors on whether it believes the gilt market is being affected by sales of government bonds.