Written by Shaan Raithatha, senior economist at Vanguard Europe
Expect the MPC to keep Bank Rate on hold at 5% at its September meeting. Although services inflation, pay growth and GDP data released since the August meeting all undershot expectations, we don’t think it will be enough to move the dial on Thursday.
We continue to expect a 25bp cut in November and quarterly cuts thereafter. We also expect the pace of quantitative tightening to be maintained at £100bn over the next year.
The Bank of England is expected to keep Bank Rate on hold on Thursday at 5%, after cutting rates by 25bps at its previous meeting in August. Recall that the decision to cut in August was a close one, passing with a 5-4 majority, with those that voted to cut stating the decision was “finely balanced”. Since this last meeting, various senior MPC members have communicated a somewhat cautious approach to the future path of policy easing.
For example, on 23rd August, Governor Bailey stated the MPC needs “to be cautious because the job is not completed … policy setting will need to remain restrictive for sufficiently long until the risks to inflation have dissipated further… and the course will therefore be a steady one”. This tone was similar to Chief Economist Pill’s comments a couple of weeks earlier, who stated that “we shouldn’t yet be promising that rates are going to move down further in the very short term”.
That said, recent data will encourage the MPC. Services CPI inflation significantly undershot the Bank’s forecast in July – it now stands at 5.2% yoy – whilst momentum in regular private sector pay growth moderated further, and GDP for July also surprised to the downside. The global backdrop has shifted too, with markets pricing in a more aggressive path of policy easing for both the Fed and ECB over the last six weeks.
Our judgement is that these developments will not be enough to convince the majority of MPC members to cut again on Thursday, though it does skew the risks towards a faster pace of easing thereafter.
September’s meeting will also see the annual review of the pace of quantitative tightening. Expect the MPC to maintain the current £100bn annual pace, which would cause the stock of outstanding purchased gilts to fall from £700bn to £600bn over the next year. Given the notable increase in redemptions over the next 12 months, expect the pace of active sales to drop considerably to around £15bn.
