MNI BOE WATCH: 25BP Cut, Supply Side Re-think On Cards
MNI (LONDON) - The Bank of England is widely expected to cut Bank Rate by 25 basis points to 4.5% at its meeting this week, with the spotlight falling on an updated supply stocktake, the Bank agents' pay survey and a potential re-think of the level of the neutral rate.
The Monetary Policy Committee’s vote is expected to be a repeat of the eight-to-one decision that delivered the previous cut in November, with three members backing, but failing to get, another cut in December. Growing concern over the weakness of economic activity and higher market rates should feed through into softer quarterly growth and inflation forecasts, paving the way for further easing ahead.
The MPC has not published a comprehensive overview of the neutral rate since 2018, with committee members having said it has likely to have risen somewhat since the earlier modal estimate of around 0.25% in real terms, or 2.25% nominal (See MNI POLICY: BOE Looks Set To Edge Up Neutral Rate Estimate). The new central estimate could be somewhere close to or just below 3% nominal, implying that the MPC can continue to cut while still keeping policy restrictive.
The completion of the annual supply stocktake will also help the MPC to discern whether the softening labour market primarily reflects weaker demand or also supply constraints, in part due to the rise in employer taxes.
INFLATION PROJECTION
Higher market rate expectations compared to the previous forecast round could push the two-year-ahead central inflation projection in February’s Monetary Policy Report below the 2.0% target. This had been just above, at 2.2%, at the two-year mark in the November forecast.
At the December meeting, the latest Bank Agents’ intelligence had suggested that average pay settlements in 2025 would be within a range of 3% to 4%, and this will be updated in February, with official early data volatile and unreliable due to collection problems.
At the press conference, BOE Governor Andrew Bailey is likely to face questions over the impact of higher market rates, reflecting in part the rise in U.S. yields, on policy, and how much of the rise in gilt yields the Bank thinks is due to UK-specific factors. (See MNI INTERVIEW: Gilt Hit Weighs On Inflation - Ex-BOE Saunders)
The MPC has, so far, ducked any detailed public analysis of the potential effects of U.S. tariffs and the impact of the uncertainty generated by Washington’s fast-shifting trade policy. Bailey may have to do more than repeat his previous "wait-and-see" line when asked about it, with tariff rises having already been announced on Chinese imports and unveiled and postponed on Canadian and Mexican ones.