Introduction
The Bank of England (BoE) is likely to keep interest rates at a 15-year high in today’s decision. However, investors are more focused on whether policymakers will push back against market expectations of multiple rate cuts next year. The BoE has held rates at 5.25% since August, aiming to combat inflation pressures. Meanwhile, other central banks have signaled potential cuts, challenging the BoE’s stance.
Inflation Concerns and Market Expectations
Despite a decrease from its 41-year high in October 2022, inflation in Britain remains at 4.6%, more than double the BoE’s target and higher than other developed nations. Investors are currently pricing in almost five quarter-point reductions in Bank Rate throughout 2024, with the first cut potentially occurring in March. Such market bets may be troubling for the BoE, which remains worried about inflationary pressures.
Economic Data and Possible Course Adjustment
Recent economic data in the UK, including a 0.3% contraction in October, suggests a potential risk of recession. Additionally, wage growth has slowed, although it remains a significant source of inflationary concern for the BoE. Considering this data, there is a possibility that inflation may fall faster than anticipated, leading to a need for the BoE to change course earlier than expected.
Upcoming Factors and Rate Expectations
The BoE will also consider the finance minister’s budget update, which sets the stage for tax cuts ahead of the 2024 national election. The central bank’s announcement will be sandwiched between those of the U.S. Federal Reserve and the European Central Bank, both expected to maintain their rates. The Fed and ECB have seen earlier and faster rate cuts due to inflation being closer to target in their respective regions. The BoE has limited opportunities to adjust market rate expectations this month, as there are no scheduled quarterly forecasts or news conferences.
Views from BoE Policymakers
Some BoE policymakers argue that rates should continue to rise. In the last month’s vote, three out of nine members of the BoE Monetary Policy Committee supported a quarter-point rate increase. Economists predict they are likely to vote the same way this time. However, Chief Economist Huw Pill has discussed the possibility of a rate cut, although Governor Andrew Bailey believes it is too early to have such discussions.