MNI BOE WATCH: Cuts 25BP, Sees Slow Return To Inflation Target
MNI (LONDON) - The Bank of England’s Monetary Policy Committee voted eight-to-one to cut Bank Rate by 25 basis points to 4.75% at its November meeting, but it substantially raised its inflation projection to reflect the impact of the fiscal easing in the Oct 30 Budget.
Only Catherine Mann dissented, backing unchanged policy, and Governor Andrew Bailey said that further gradual easing was likely following only the second cut this cycle. The MPC's new quarterly forecasts, however, were raised substantially, with inflation shown moving above the 2.0% target and only returning to it in Q2 2027, with the 2026 forecast now 2.25% compared to 1.5% previously. (See MNI INTERVIEW: UK Budget Ups Inflation Pressure - OBR Miles )
"We need to make sure inflation stays close to target, so we can't cut interest rates too quickly or by too much. But if the economy evolves as we expect it's likely that interest rates will continue to fall gradually from here," Bailey said in a statement to reporters.
The major upward driver of inflation was the Budget, with Bank economists managing to include its effects in the baseline forecast. This is projected to raise public expenditure by GBP70 billion a year from 2025-26 onwards, raising inflation by just under 0.5 percentage point and GDP growth by 0.75 points at peak, according to the BOE’s accompanying Monetary Policy Report
With the Budget fuelling near-term growth, the MPC dropped its prediction that a negative output gap would open up next year. The Committee expected demand and supply to remain broadly in balance in 2025, forecasting a zero output gap next year and only a small -0.25% of GDP gap opening up in 2026.
UNCERTAINTY HIGH
In the press conference, Deputy Governor Clare Lombardelli stressed that estimates of the output gap were very uncertain, while fellow Deputy Governor Dave Ramsden said a gradual policy approach allowed them to reflect that uncertainty and react as things become clearer.
Bailey declined to expand on what was meant by "gradual easing," or to say whether it was compatible with a rate cut every other meeting. In response to questions about the inflation risks posed by the government of possible hikes in U.S. tariffs following the re-election of Donald Trump, the governor was guarded, saying that the BOE would wait and see what happened.
Bailey and Ramsden both highlighted the strong linkages between UK and U.S. rate curves, with recent moves largely happening in tandem.