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The MPC has trimmed Bank Rate by 25bps, taking it to 4.75% as expected, in their latest policy decision. That said, and as we had warned, the more consequential outcome of today’s meeting would be found in the Bank’s forward guidance.
Granted, the Bank’s guidance included in the statement and the minutes was left largely unchanged. But the MPR is now signalling that inflation pressures are set to remain more elevated than previously assumed – a consequence of the recent budget announcements. The upshot is that in Governor Bailey’s own words, the Bank “can’t cut interest rates too quickly or by too much” with rates expected to fall “gradually” moving forward.
With this in mind, we are sticking with our prior call for rates to be left unchanged in December, with the MPC now shifting to a once-per-quarter pace of cuts.
Ahead of the Bank’s latest set of communications, our focus was squarely on the Bank’s assessment of current conditions, and changes to forecasts contained in today’s MPR. Unsurprisingly, Bank staff recognised that inflation has slowed more than expected, and is now 0.4% below the August MPR projections. But with this undershoot largely chalked up to the impact of fuel, accommodation, and airfares, this is not an indication that the Bank thinks underlying inflation pressures will be lower than previously thought moving forward.
Rather, staff indicated that measures announced in the budget are likely to keep inflation elevated over the Bank’s forecast horizon.
In keeping with the OBR’s projections, Bank staff expect that the government’s new spending plans will boost the level of GDP by around 0.75% in one year’s time, relative to projections from the August MPR, reflecting the front-loaded nature of the government’s spending plans. Moreover, the budget is also expected to boost CPI inflation by 0.5% at the peak relative to previous forecasts. These projections now see inflation only returning to target in 2027 – the BoE had previously signalled this would happen in 2026. The Bank’s modal inflation projection now forecasts inflation at 2.2% in 2 years’ time (previously 1.7%), based on market rates, falling to 1.8% in three years (previously 1.5%).
Admittedly, it is worth noting that the assumed path for Bank Rate used by staff in the forecasts is taken from the 15 working day average of market implied rates up to October 28th. If the current path for Bank Rate were used, interest rate expectations could have been as much as 50bps higher, a point raised in the press conference.
Using these higher rates, the Bank’s inflation forecast would have dropped back to 2% in 2026. Nor do the forecasts take account of Trump’s election victory, and the associated risks for tariffs and fiscal spending in the US. This is a further confounding factor – one that could have a significant impact on the MPC’s stance moving forward.
With this in mind, we can understand the Bank’s hesitancy to commit explicitly to a specific pace of easing.
That all being said, we think the steer from today’s press conference is clear. The Bank views the recent fiscal announcements in the UK as inflationary, and all else being equal that means a slower pace of easing.
Given this, we are comfortable retaining our case for Bank Rate to remain unchanged in December as the MPC moves to a once-per-quarter easing pace.
Markets have largely aligned with that view too, signalling only a minimal risk that the BoE cuts rates again by year-end, with the pound rallying 0.5% in response.
Author:
Nick Rees, Senior FX Market Analyst