MPC signals no imminent rate cut as members await further economic data and fiscal developments
The Bank of England is likely to keep the bank rate unchanged at 4% at its upcoming meeting next week, as policymakers remain wary of reducing rates prematurely.
Oxford Economics believes that most members of the central bank’s Monetary Policy Committee (MPC) are mindful of the risks of easing policy too quickly and are seeking more sustained evidence of weaker economic data and a slowdown in pay growth before considering another cut.
Recent data has shown some signs of softer inflation and pay growth, but these have not been sufficient to shift the majority on the committee, according to Edward Allenby, senior UK economist at Oxford Economics.
September’s Consumer Prices Index (CPI) inflation held steady at 3.8%, which was 0.2 percentage points below the bank’s forecast. The lower-than-expected figure was mainly due to subdued services inflation and an unusual drop in food prices, though the Office for National Statistics attributed the latter to temporary discounting and sales activity.
Services inflation, a key focus for the MPC, remained at 4.7%, 0.3 percentage points below projections. This was partly attributed to temporary factors such as air fares and live music, as well as a genuine cooling in underlying services inflation. However, the committee is likely to treat these developments with caution, preferring to see a consistent trend before altering policy, Allenby pointed out.
Private sector regular pay growth, the MPC’s preferred measure, has also been slightly weaker than anticipated but still sits around one percentage point above the level considered consistent with the bank’s 2% inflation target. The committee is expected to pay close attention to upcoming pay settlements and labour market data before making further decisions.
“Changes to the Monetary Policy Statement will be key to the MPC’s communications in the coming months,” Allenby said. “The new format will attempt to better describe the centre of gravity on the committee and give individual members space to explain their decisions and outlook.”
The MPC has indicated that further rate cuts are likely in the future, but the timing and pace remain uncertain.
“The upcoming Budget on Nov. 26 could be a key influence, particularly if — as we expect — the Chancellor announces a sizeable tightening of policy,” Allenby said. “We think a majority of committee members will want to see much clearer evidence of downside surprises in the data being sustained and the Agents’ findings on next year’s pay deals before voting to cut bank rate again.”
Financial markets have responded to recent softer inflation data by increasing the probability of a rate cut by year-end, but the MPC’s own forecasts for November will be based on higher market interest rate expectations than those used in August. The committee has also been placing less emphasis on its central forecast in recent months, instead focusing on a broader range of indicators and risks.
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