With CPI inflation at 1.7%, the Bank of England is expected to cut the interest rate this week, but
Thomas Watts, Senior Investment Analyst, abrdn MPS, points towards a speech given by BoE Governor, Andrew Bailey at a meeting of the Institute of International Finance last week, when he commented that “disinflation” had actually taken place “faster than we expected it to”, but added that the economy still needs to see a further drop in services inflation, despite recent progress.
Watts says: “Markets are expecting a 0.25% rate cut during the coming week, taking the base rate down to 4.75%. Whilst some investors and economists then expect another cut to follow shortly afterwards in December, a mildly inflationary Budget from the government has muddied the water slightly. With a move being largely priced in by markets, it will be the bank’s forward guidance that could really move markets, as they give their outlook for the economy and future rate policy.”
Susannah Streeter, head of money and markets, Hargreaves Lansdown, also ecxepcts a rate cut in November, but she says, December hangs in the balance.
“While the Budget might have set off a maelstrom of worries about the potential for hotter prices in the years ahead, the Bank of England still looks set to cut interest rates this week, given that inflation is currently below target. Policymakers will have a keen eye trained on the potential for companies to pass on the cost of higher National Insurance contributions and will assess just how much the big investment bazooka could add to upwards price pressures.
“On the flip side, there is more potential for wage restraint given increased staffing costs – and it is stubborn pay growth which has stopped some policymakers from voting for rate cuts at previous meetings. Consumer sentiment has also been hit, with footfall falling in town and city centres, which could add to deflationary pressures for shop prices. But, while a vote for a fresh cut still looks likely on Thursday, bets have been pulled back for a further reduction in December. Overall, the Bank is expected to go a bit slower on interest rate cuts, and a move below 4% by the end of next year currently looks highly unlikely.”
Watts adds: “Towards the end of the week, we head to Wall Street where the Federal Reserve will give their views on the economy. Although also expected to move on interest rates during this upcoming meeting, possibly cutting by 0.25%, much like here in the UK, the bank’s future guidance will provide the main talking points for economists going forward.”
