BoE decision: a hawkish cutting cycle

As expected, MPC members voted 8 to 1 in favor of lowering the Bank Rate to 4.75%. Catherine Mann voted against a rate cut , preferring to keep the Bank Rate unchanged at 5%. The BoE ’s governor Bailey stressed that a gradual approach was necessary in remov ing the degree of monetary policy restriction and thus the BoE cannot reduce interest rates “too quickly or by too much”. The job market, while continu ing to loosen, remains tight . In addition , the MPC saw upside risks to inflation from greater trade fragmentation. The BoE stressed that the Budget was expected to shore up inflation by just under 0.5pp at a peak between mid-2026 and early 2027 (compared to the August forecast) . At the same time, the BoE’s updated forecast included budget boost to the level of GDP of around 0.75pp , but in a year’s time. This reflects stronger government consumption and investment “more than offsetting” the negative impact on growth from tax hikes. Also, those forecasts do not yet account for the effect of higher market borrowing costs since the announcement of the budget and hence the outlook for inflation and growth would likely be somewhat lower. Meanwhile, the unemployment rate is set to pick up somewhat less than previously expected to 4.2% in Q4 2024 (4.4% forecast in August) and then edge even lower to 4.1% in Q4 next year (down from 4.7% in August) and then rise to 4.3% in Q4 2026 (down from 4.7% in August) . Overall, the BoE sees less economic slack than before the budget, particularly in 2025 and the first half of 2026 , expecting around 0.5% of GDP in slack over the medium term. The MPC will stay committed to ensuring that the Bank Rate stays restrictive for a sufficiently long time until the upside risks to inflation have dissipated further. Overall, it looks like t he BoE will take a n even more gradual stance and we now expect cut s only at every second meeting , with the Bank Rate ending 2025 at 3.75% (up from our previous forecast of 3.5%) .