Free Trial

MNI POLICY: BOE Points To 4% Peak At Most, Then Rate Cuts

(MNI) London

The Bank of England is heading for a cycle peak in Bank Rate of no more than around 4%, followed by a fairly rapid switch to easing to avoid a slide in projected inflation below target, projections from its November Monetary Policy report and comments by policymakers suggest.

The BOE’s “best view” of the peak is closer to the current 3% level of Bank Rate than the 5.25%, based on previous market assumptions of the highest point of the cycle, which the BOE used in its market-based projections, Governor Andrew Bailey told a news conference after its Nov 4 decision. While the Bank and its chief economist Huw Pill have signalled more rate rises are to come, this implies a peak of no more than roughly 4.1% at most, still well below the 4.7% priced in by investors today.

The BOE’s Monetary Policy Report projections imply that inflation will substantially undershooting the 2% target within the forecast horizon if rates either follow the market path or remain at a constant 3%, suggesting that cuts may have to follow the hiking without much delay.

On market rates, the MPR shows the target CPI measure at 1.43% in two years' time, according to the modal or most likely projection, and at just 0.02% in three years. Assuming Bank Rate stays at 3%, it falls to 2.16% in two years and 0.84% in three.


An activist approach, of hiking rapidly then reversing, may be an optimal policy response to such an outlook, according to at least one Monetary Policy Committee member. In a speech at an MNI event on June 20, Mann argued that if near-term inflation is the dominant concern, then it is addressed by swift hikes, while if medium-term output losses are a problem, then policy needs to reverse promptly. Mann said. (MNI BRIEF: BOE Mann Sees Inflation Pressure From Weak Sterling)

With the November MPR forecasting eight consecutive quarters of negative growth at market rates, and inflation still above 10% in the first quarter of 2023, arguments for a trade off will build.

Some MPC members, though, may draw different conclusions. The mean, rather than the modal, projection showed CPI falling below the 2.0% target on constant rates only in Q3 2025, potentially weakening the extent of any rate reversals that may be required . And on the other side of the hawk-dove spectrum, the minutes showed that Silvana Tenreyro appeared to be unpersuaded that much further tightening, if any, would be needed.

MNI London Bureau | +44 203-586-2223 |
MNI London Bureau | +44 203-586-2223 |

To read the full story



MNI is the leading provider

of intelligence and analysis on the Global Fixed Income, Foreign Exchange and Energy markets. We use an innovative combination of real-time analysis, deep fundamental research and journalism to provide unique and actionable insights for traders and investors. Our "All signal, no noise" approach drives an intelligence service that is succinct and timely, which is highly regarded by our time constrained client base.

Our Head Office is in London with offices in Chicago, Washington and Beijing, as well as an on the ground presence in other major financial centres across the world.