MNI: BOE Cuts 25bps, Now Sees Inflation At Target In Q2 2027
The Bank of England Monetary Policy Committee delivered its second rate cut this cycle, lowering its policy rate by 25 basis points to 4.75%, but raised its inflation projection substantially having factored the October 30 Budget arithmetic into its baseline projection.
Eight members of the MPC voted for the 25 bps cut with only Catherine Mann dissenting in favour of leaving policy on hold.
Governor Andrew Bailey said that if the economy unfolded as expected "it's likely that interest rates will continue to fall gradually from here."
The BOE MPC's upgraded forecasts showed CPI rising to 2.4% in Q4 of 2024 and staying above the 2.0% target, standing at 2.2% in Q4 2026 and only dipping just below target in Q2 2027.
The Bank estimated that the October Budget would, at peak, raise inflation by just under 0.5 of a percentage point and GDP growth by 0.75 points at peak in a years' time, with the return to the inflation target delayed by a year.
The detailed forecasts highlighted how the Budget, which contained substantial fiscal easing with government expenditure to rise on average by GBP70 billion per year from 2025-26, has changed the terrain.
CENTRAL PROJECTION
The MPC's central projection in August had shown a negative output gap opening up in 2025 but its November projection showed supply and demand staying in balance in 2024 and 2025 with a small amount of excess supply only now emerging in 2026.
The Bank's full supply side stock-take is expected in February.
MPC members continued to express their policy views in relation to three scenarios, with the second scenario, which is closest to the central projection, requiring a negative output gap to open up to get inflation back to target.
The minutes said that MPC members put different weights on the likelihood of each scenario materializing and the uncertainty around how rapidly the acceleration in earnings following the inflation shock would unwind was cited as one key doubt.
The MPC's inflation projections had no skew, to upside or downside, with regular private sector earnings growth expected to be 3.25% in 2025 and 2026, up from the 3% and 2.75% previously forecast.
Yearly GDP growth was forecast to be 1.7% in Q4 this year and again at 1.7% in Q4 2025, with the previously predicted slowdown in 2025 much less evident, with growth hit a low of 1.4% in Q2 .