MPC meeting: rates held, but early Christmas present ahead?
As we expected, the Bank of England (BoE) held interest rates at 4% at November幼女视频檚 Monetary Policy Committee (MPC) meeting, although in a 5-4 vote. With inflation at almost double the target, the MPC幼女视频檚 waiting to see if the Autumn Budget is as disinflationary as the Chancellor hinted at in her Downing Street speech earlier this week. Assuming it is, we幼女视频檝e pencilled in an interest rate cut for December. In any case, we expect the base rate to continue its downward path before settling around 3.5%.
Lower inflation peak coaxes MPC into 幼女视频榙ovish hold幼女视频
The Bank of England opted for another hold in November, as we expected. The decision signals MPC members preferring to wait and see what the Autumn Budget has in store before deciding whether to make another cut this year.
The most interesting part of this month幼女视频檚 MPC meeting was the vote split, which was tighter than anticipated. Bank of England Governor, Andrew Bailey, used his casting vote to deliver a 5-4 majority in favour of a hold.
The vote split confirms our view that the MPC has moved in a dovish direction since the last meeting. Inflation now looks to have peaked and below the 4% it previously forecast. The latest also states, 幼女视频渙verall, the risks were now more balanced in regards to inflation幼女视频. This is a stark change from when the Committee emphasised how 幼女视频渦pside risks around medium-term inflationary pressures remain prominent in the Committee幼女视频檚 assessment of the outlook幼女视频.
What幼女视频檚 more, private sector pay growth has consistently surprised to the downside of the MPC幼女视频檚 forecasts recently. This will reassure the majority on the Committee of the retreating risk of the second-round effects outlined in the 幼女视频渋nflation persistence幼女视频 scenario. That幼女视频檚 where households幼女视频 and firms幼女视频 experience of nearly five years of above-target inflation prompt them to bargain more aggressively for pay rises and pass on price increases to consumers, which would keep inflation higher for longer.
November幼女视频檚 Minutes also confirm that Governor Bailey幼女视频檚 vote for a dovish hold was based on finding 幼女视频渢he mechanisms underlying upside risks less convincing than those underlying the downside幼女视频. In other words, he幼女视频檚 more concerned about the risk of weaker demand from a persistently high savings ratio or, say, a contractionary Autumn Budget. Both would weigh on growth and allow inflation to fade quicker than in the BoE幼女视频檚 central forecast, suggesting interest rate cuts would be necessary.
Could we see another rate cut before the end of the year?
We agree with the MPC幼女视频檚 decision to hold interest rates. We also take the word 幼女视频渃areful幼女视频 being dropped from its guidance as further confirmation that interest rates will continue to come down over the coming months.
Indeed, a November rate cut had always seemed optimistic. The MPC is right to emphasise that the latest inflation figures are 幼女视频渏ust one month of data幼女视频 and wait for a clearer signal. Compounding this, the bigger question over the coming weeks is whether the Autumn Budget will be disinflationary or stagflationary. The answer is likely to determine both how many and how quickly we幼女视频檒l get future rate cuts.
However, we think a December rate cut is an odds-on bet for a few reasons.
First, inflation came in lower than expected in September and should now start to fall back. That said, some members of the MPC clearly wanted further confirmation. Fortunately, the Committee will have two more months of inflation and pay data to confirm this view by the next meeting, at which point they幼女视频檒l likely be assured the disinflationary trend remains intact.
More importantly, the Chancellor seems intent on ensuring that the upcoming Budget avoids a repeat of last year幼女视频檚 where an array of stagflationary tax hikes pushed up inflation. A contractionary fiscal event that focuses on deflationary taxes 幼女视频 such as income tax 幼女视频 would leave the door open for the MPC to offset the negative effect on growth, potentially with both quicker and more rate cuts.
However, if the government opts to repeat last year幼女视频檚 smorgasbord of big increases to the smaller inflationary taxes to fill the hole in the UK幼女视频檚 public finances, then this would limit the MPC幼女视频檚 ability to cut interest rates to offset the negative effect on growth.
For now, we幼女视频檝e pencilled in the next rate cut for December because we幼女视频檙e expecting a more deflationary budget than previously anticipated. Markets agree, almost doubling their bets on a December rate cut since Wednesday. In any case, we expect interest rates will continue to come down, reaching 3.5% by the middle of next year.
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