MNI BOE WATCH: MPC To Cut, Doubts Over Fast Easing

- MNI (LONDON) - The Bank of England is expected to cut Bank Rate by 25 basis points to 4.75% at its November meeting, but a big-spending budget has raised doubts over whether a negative output gap previously predicted for next year will materialise, tilting the scales against rapid policy easing.

While there is little doubt over this week’s cut, the second in the current cycle following August’s 25bp reduction, markets which had moved to price in a third in December just weeks ago have now priced it out. November's updated quarterly forecast along with commentary from Governor Andrew Bailey and colleagues could confirm that consecutive cuts are now less plausible.

The BOE's August central projection showed aggregate demand and supply broadly balanced before some economic slack emerges during 2025, despite the Bank's relatively pessimistic view on productivity, which would keep a lid on potential growth. (See MNI INTERVIEW: UK Budget Investment Spending To Curb Rate Cuts )

BUDGET MATHS

But room for slack has contracted since the Oct 30 Budget showed government spending rising by about GBP70 billion pounds a year over the next five years, equivalent to GBP1,000 pounds more per household, with around half clawed back in tax rises. (See MNI INTERVIEW: MNI INTERVIEW: UK Budget Ups Inflation Pressure - OBR Miles )

Key Budget arithmetic looks set to be included in the quarterly forecasts, despite the tight timeframe, and possibly in the central forecast. While the BOE could analyse the Budget in a separate scenario this could give the appearance of fiscal commentary, which it would be keen to avoid. (See MNI POLICY: Budget To Push Up BOE Growth, Inflation Forecasts )

In August, the BOE predicted CPI inflation would rise again later in the year to peak near 2.75% but headline inflation has been running softer than predicted, with 12=month CPI coming in at 2.2% in August and 1.7% in September. In the MPC’s August modal projection CPI inflation was shown back below the 2.0% target at 1.7% in two years’ time and at 1.5% in three years, but some analysts have said that the two-year forecast is likely to be shifted much closer to the 2.0% target in this round.