Market News

The Bank of England (BoE) is widely expected to lower interest rates at its meeting this week, marking the fifth cut since last August. However, while a 0.25% cut is all but certain, the Monetary Policy Committee (MPC) is not expected to accelerate the pace of easing, leaving the future trajectory of monetary policy in the balance.

City traders are pricing in an 80% probability that the nine-member committee will reduce the Bank Rate from 4.25% to 4% on Thursday, returning borrowing costs to levels last seen in March 2023.

“A rate cut is never nailed on, but it’s looking very likely we’ll see one when the Bank of England meet next Thursday,” said Sarah Coles, personal finance columnist at Yahoo Finance UK and head of personal finance at Hargreaves Lansdown.

Financial markets have anticipated the move for some time, and they have also factored in at least one more cut this year, likely in November.

Yet with inflation still running well above the Bank’s 2% target and signs of labour market weakness emerging, the debate inside the MPC is likely to be contentious.

A tidy cutting cycle?

“To cut, or not to cut, is not the question facing the Bank of England interest rate committee. At least, that’s what the markets are saying,” said Laith Khalaf, head of investment analysis at AJ Bell.

“They have already almost fully priced in an interest rate cut this week, so focus will lie not so much on the decision itself as on the precise split of the votes from the interest rate committee, and on the forecasts for inflation and growth in the accompanying economic report,” he added.

“Of course, if the Bank of England chooses not to cut rates, there will be a sizeable backlash in the bond markets. But that seems unlikely on this occasion.”

Khalaf highlighted that at the MPC’s last meeting in June, three members already backed a cut to 4%. With economic data weakening since, including a softening labour market and rising unemployment, momentum appears to have tilted further toward easing.

“The unemployment rate has risen to its highest level since the pandemic, and wage growth continues to cool. No doubt one of the factors behind a weaker labour market is the national insurance hike announced by the chancellor in last year’s budget, which came into force in April,” he said.

Khalaf also pointed to the Bank’s measured approach to cutting, calling the current cycle “metronomic” in nature.

“The Bank of England has been metronomic in its activity during this rate-cutting cycle, with base rate getting chopped back every three months since last August. This fits in with the ‘gradual and careful’ narrative expounded by the Bank. One year on from that first rate cut, the steady drum beat of the rate-cutting cycle demands another thump.”