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- A quarter-point rate cut is expected from the Bank of England as growth slows and the labor market weakens.
- The MPC is likely to remain divided, but Governor Bailey’s vote is key as inflation remains elevated.
- Officials signal caution on further cuts due to lingering wage and inflation risks.
The Bank of England is expected to cut interest rates by 25 basis points on Thursday as the economy grapples with a weak labor market and stagnant UK economy, leaving no reason for the BOE to keep rates restrictive.
Markets are expecting a vote of 5-4 by the Monetary Policy Committee, possibly bringing rates to their lowest level since 2023 at 3.75%.
BOE Faces a Split Decision
The BOE’s decision is expected to show division among the MPC, with the outcome mostly siding with the governor’s vote. When the MPC last met in November, Governor Bailey indicated he was prepared to loosen policy if incoming data continued to point toward falling inflation.
UK inflation came in at 3.2% YoY in November, dropping from October’s figure of 3.6% YoY. Inflation in the UK remains the highest among the G7 economies. ⁽¹⁾
The Governor’s Vote Is Key
Public comments from Monetary Policy Committee members since then have suggested that they remain split on whether job losses or inflation pressures pose the biggest risk to the economy. ⁽²⁾
Governor Bailey didn’t speak much about interest rates during his previous press conference since he hinted at the possibility of a rate cut if inflation continues to fall.
Bailey was part of the majority securing the vote for unchanged policy in November, but he opened the door to more policy easing at a later date if inflation continues to fall. ⁽³⁾
Weak Economic Growth and Labor Market
The UK unemployment rate climbed to its highest level in almost five years and wage growth eased, providing more support for expectations of a rate cut from the BOE. The unemployment rate reached 5.1% from August to October. ⁽⁴⁾
Annual wage growth, stripping out bonuses, rose 4.6% YoY, higher than expected and showing persistent inflation. ⁽⁵⁾
UK GDP data for October contracted by 0.1%, reinforcing expectations of a rate cut. If the economy continues to weaken, the BOE might need to cut rates deeper.
Caution Over the Path Ahead
Despite a rate cut, BOE deputy governor Lombardelli expressed concerns for upside risks to inflation and urged caution on future cuts.
Chancellor Rachel Reeves’ Budget provided a modest amount of support for UK activity, peaking at 0.2% in 2027, with tax rises set to affect later in the parliament. ⁽⁶⁾
BOE staff forecasts imply measures in the Budget aimed at lowering the cost of living will help drive headline inflation toward the official 2% target next year.
The BOE is expected to remain gradual in its rate cut path, but officials have more recently signalled that monetary policy could level out next year.
