The Bank of England’s Monetary Policy Committee (MPC) decided to reduce the Bank Rate by 25 basis points to 4.75%. However, despite being widely expected, the vote was 8-1 in the context of an expectation that the recent budget will add slightly to the level of inflation over the next year or so which means that the pace of rate cutting will be slower than it might otherwise have been.
The 25 basis points (bp) cut in UK interest rates had been signalled almost since the previous meeting and so came as little surprise when it was announced by the Bank of England Monetary Policy Committee on Thursday. What was, perhaps, slightly unexpected was that the vote was 8-1 with Catherine Mann (one of the four independent MPC members) voting to keep rates unchanged.
The source of her concern was largely around inflation, for a couple of reasons. Although the latest rate for the consumer price index (CPI – the UK headline measure which the MPC is targeted as being +2%) fell to +1.7% in September, it will rise back above the target rate in October with the already announced increases in the consumer energy price cap. The second issue is the Bank’s view of inflation after the Government’s Budget announcements; the Bank’s latest forecast (and indeed the view of the OBR) is that inflation will rise in 2025 and the Bank’s staff have it peaking at +2.75% at the end of the year before falling back slowly to the target rate over the next 18 months.
The Bank’s latest forecast for GDP is a little below that of the OBR in their budget review – the MPC forecast has +1¾% for 2025 while the OBR predicted +2%. In their forecast, the Bank’s staff now judge that all of the impact of higher interest rates since the middle of 2021 on the level of UK GDP is likely to have come through and under the latest market-implied path for interest rates, monetary policy is expected to have a broadly neutral impact on GDP growth over the forecast period. The projections assume the fiscal path set out in the recent Budget.
The conclusion of this is that future cuts in UK Bank Rate are likely to be a little slower than had been forecast. At our recent Seminar, the expectation was for one more cut in the UK – which we saw this week – and then 4 similar reductions through 2025. The Governor of the Bank said rates were likely to “continue to fall gradually from here” but cautioned they could not be cut “too quickly or by too much”. Another cut at their December meeting now looks very unlikely and it remains to be seen if we get 4 more reductions in 2025 – much will depend on the path of inflation and any external shocks that might occur (such as a sharp rise in oil prices). It also seems likely that the next cut is likely to come a little later in 2025 than originally anticipated.
You can get the Monetary Policy Summary and minutes of the MPC meeting from the Bank’s website at https://www.bankofengland.co.uk/monetary-policy-report/2024/november-2024 or request this from MTA.