Bank of England rate cut a close call ahead of the Autumn Budget

LONDON — The Bank of England on Thursday is set to make its last interest rate decision before the Autumn Budget later this month, with economists saying that although the central bank is more likely to hold rates steady, it’s not a given.

“We can never know for sure which way any meeting will go, but this one is … one of the hardest to call for some time,” Dean Turner, chief euro zone and U.K. Economist at UBS Global Wealth Management’s Chief Investment Office, said Tuesday.

“It’s not a case of whether they will cut interest rates at some point — the answer to that is yes, we believe they will … if policy is tight, inflation is falling, and growth is lacklustre, then interest rates are going to come down. The hard part is anticipating when,” he added.

Economists have forecast, for the most part, that a majority of the BOE’s nine-member monetary policy committee (MPC) will vote to keep its key interest rate, known as Bank Rate, unchanged at 4% at its November meeting.

There are some dissenters, however, with the likes of Barclays, Nomura, Mizuho and Unicredit believing there could be a surprise cut today, to 3.75%. Julien Lafargue, chief market strategist at Barclays Private Bank, conceded Tuesday that while there was a case for a rate cut this month, it was “a very finely balanced decision.”

In any case, there is a general consensus that rate-setters could trim rates as soon as December, and will cut again over the coming year in response to expected cooling inflation — the rate of which remained unchanged for the third consecutive month in September, at 3.8% — and a softening of labor market data.

Most MPC members are more concerned about the implications of cutting rates too quickly rather than too slowly, Oxford Economics noted in analysis, and the BOE will want to see evidence of sustained downside surprises in the data and pay growth slowing to a target-consistent pace next year before voting to cut again.

“If we are right and the BOE pauses [this] week, the question will then turn to when the next cut will come,” Allan Monks, chief U.K. economist at JP Morgan, said in a note.

“We have argued that further downside surprises in the inflation and labour market data will determine that. For example, a move up in the unemployment rate to 4.9% in September could be significant, as well as further soft sequential gains in core CPI services and private pay.”

Assuming the BOE does hold rates on Thursday, UBS’ Turner said that he expects the central bank to then “signal that a cut is coming no later than February — maybe as soon as December.”

“Policymakers will not be armed with fresh forecasts in December, but they will have the budget and the impact analysis in their pockets,” he said.

The fact the central bank’s meeting this month comes ahead of the upcoming Autumn Budget on Nov. 26 is another reason for the BOE’s policy makers to pause for thought.

It’s widely expected that Chancellor Rachel Reeves will announce tax rises as she looks to fill a fiscal black hole estimated to be anywhere between £20-50 billion ($20-$65.2 billion), based on assumed forecasts of lower productivity, servicing debt and the cost of U-turns on welfare spending cuts, among other things.

Earlier this week Reeves gave a clearer indication that tax rises are coming and is she is expected to consider increasing income tax as one way to raise revenues, but she has not given any further detail. Tax rises would likely act as another damper on inflation by reducing consumer demand.

“If the measures [in the budget] include a hike in income tax, they would add to the drag on households’ real incomes from high inflation and slowing pay growth. As these factors weigh on demand inflation will likely ease,” Andrew Wishart, economist at Berenberg, said in a note Friday.

“If so, this will allow the Bank of England to cut interest rates by 25 basis points at least twice next year to 3.50%. A front-loaded fiscal tightening would open the door to a third cut in 2026, to 3.25%,” he added.