Interest rate cut expected as Bank gives verdict on budget

The Bank of England is expected to deliver its second interest rate cut of the year next week as ratesetters give their first verdict on the government’s budget plans.
The nine-strong monetary policy committee, which sets interest rates, is forecast to cut the base rate by a quarter of a percentage point to 4.75 per cent, as inflation has fallen below the central bank’s 2 per cent target to 1.7 per cent. Economists and traders are betting on a clear eight to one majority in favour of monetary loosening on Thursday.
The committee will also publish its latest inflation and growth forecasts, providing the first indication of whether the Bank thinks Labour’s tax and spending plans could raise short-run inflation and stimulate growth.
Investors have pared back their expectations for two rate cuts before the end of the year after Rachel Reeves announced a £70 billion a year spending plan, carried out through £40 billion in tax rises and £30 billion in extra borrowing.
Matt Swannell, chief economic adviser to the EY Item Club, a forecaster, said the budget announcement would not “derail a cut in bank rate at November’s MPC meeting”.
“At its September meeting, the Bank of England’s guidance set the stage for another reduction in Bank Rate. Since then, key barometers of inflation’s stickiness — services inflation and pay growth — have continued to fall back more quickly than the MPC had previously forecast. On balance, these positive developments should give most of the MPC the confidence to dial back Bank Rate a little further,” Swannell said.
The Office for Budget Responsibility, the government’s fiscal watchdog, said Labour’s policies would raise average inflation by 0.6 percentage points next year and inflation would only sustainably fall to the Bank’s 2 per cent target in 2029. This is due to a short-term boost to consumer spending in the next year.
Traders have sold shorter-dated UK government bonds in anticipation of fewer rate cuts next year, driving up the yield on two-year gilts from 4.2 per cent at the start of the week to 4.45 per cent on Friday — a five-month high.
Ales Koutny, head of international rates at Vanguard, the world’s second largest asset manager, said there was still a fair chance that the Bank would keep rates on hold if it chose to upgrade its growth and inflation figures based on the budget.
“The markets still view a cut from the BoE next week as a given. I see it more as 50-50,” Koutny told Bloomberg TV.
Analysts at Nomura, a Japanese bank, said that the undershoots in inflation in recent months would lead the MPC to downgrade its inflation and growth outlooks this year. “Further ahead, we don’t expect a material revision to [the Bank’s] view on the end horizon point for either inflation or growth,” they said.