Bank of England delivers interest rate cut

7 Kasım 2024

Today’s market analysis on behalf of Michael Brown Senior Research Strategist at Pepperstone

“As expected, the Bank of England delivered a 25bp cut this lunchtime, the second of this cycle, resulting in Bank Rate now standing at 4.75%.

In contrast to this cycle’s first cut, back in August, which was a finely balanced decision among MPC members, things were much more straightforward this time around. Of the 9 member MPC, 8 policymakers voted in favour of such a cut, with only external member Mann dissenting in favour of holding rates steady. Importantly, the vote split means that the MPC’s ‘core’ – the Governor, his Deputies, and the Chief Economist – are also now all aligned on the appropriate course of monetary policy.

In the policy statement, the MPC reiterated that they will continue to take a meeting-by-meeting approach to future policy decisions, including a gradual approach to removing policy restriction, with the stance still needing to remain “restrictive for sufficiently long”, to ensure inflationary pressures are adequately squeezed out of the economy.

Accompanying the policy decision, were the Bank’s latest economic forecasts. Likely accounting for last week’s expansionary Budget, as well as a more dovish market-implied rate path at the time of forecast collation, the inflation profile was revised higher. Consequently, headline CPI is now seen at 2.2% in the final quarter of 2026, before falling to 1.8% in 2027. With this forecast conditioned on the market-based rate path, the BoE are implicitly signalling to financial markets that too great a degree of policy easing is presently priced in.

On the whole, despite expectations that the Bank might quicken the pace of policy normalisation in Q4, recent uncertainty on the inflation outlook, brought about by the expansionary Budget delivered by Chancellor Reeves last week, will likely see the ‘Old Lady’ continuing to plot a relatively cautions course, at least for the time being. As such, today’s Bank Rate cut is likely to be the last of the year, as the MPC continue to pay close attention to incoming data, particularly focusing on the persistence of underlying price pressures within the economy.

The next 25bp Bank Rate cut, then, is likely to come in February, in conjunction with updated forecasts. If, at that stage, policymakers have greater confidence in the disinflationary path being well-embedded, the pace of normalisation could well quicken through the early part of 2025. Quarterly cuts, though, remain the base case for now.

Though this outlook is somewhat more hawkish than that of other G10 central banks, such as the FOMC and ECB, hawkish policy divergence alone is unlikely to be enough to convincingly underpin the GBP. This is particularly the case if, as at present, the FX market remains squarely focused on relative growth dynamics, where the UK’s anaemic economic prospects put the pound at a substantial disadvantage to peers – especially considering continued US economic outperformance, a theme which is highly likely to persist into the second Trump Administration.”

 

Zaid Barem / YMM