The Bank of England (BoE) is about to have to make some very important interest rate decisions. This comes after strong recent economic indicators and ahead of the opposite Autumn Statement from the incoming Labour government. Andrew Bailey replacement governor Andrew Bailey and replacement deputy governor Ben Broadbent have the casting votes on the Monetary Policy Committee (MPC). This provides them the perfect opportunity to recalibrate their long-held approach to monetary policy.
Underneath this otherwise great decision-making process are some powerful and pernicious forces at play. Retail sales indicated a mixed picture of consumer demand for September. They came in up 1.5% year-over-year. On the flip side, job losses have sped up even more in a much more orderly fashion at 10,000-plus per month. This unusual confluence of continued growth in the economy amid increasing unemployment will no doubt hang over the MPC’s deliberations like an ominous cloud.
Inflation statistics present a mixed picture. The CPI—Consumer Price Index—inflation rate is currently at 3.8%. This is lower than the 4.0% year-on-year consensus and the Bank of England’s forecast. This drop could be a welcome relief. Overall, service inflation continues to perplex policymakers and make their decision to cut rates all the more difficult.
Though still in the minority, Swati Dhingra and Silvana Tenreyro, both members of the MPC, voted to lower the rate in the September meeting. They should be expected to defend that position again. Four of the committee members— including Jonathon Haskel, Catherine Mann, and possible Philip Lowe — will probably argue to hold rates steady. Such a move would indicate a very visible divide in the committee’s opinion.
Deputy Governor Ramsden has voiced dovish sentiments before. As the committee looks at the changing economic landscape, we hope he will find common ground with Dhingra and Tenreyro. As it stands, markets are pricing in approximately a 30% chance of a rate cut happening soon, suggesting investor sentiment is leaning towards an easing of monetary policy.
The MPC’s decision-making process would be powerfully shaped by the new Labour government’s first major statement, their Autumn Statement. It will include significant fiscal tightening measures, which will further define the economic terrain. This widening divergence in fiscal policy, fighting against monetary policy will make the BoE’s job that much more difficult. Analysts warned that market worries about the woeful UK growth outlook compared with the euro area could weigh on the British pound.
The possibility of a rate cut extends beyond nitpicking economic metrics. Should the BoE vote to lower interest rates, analysts are forecasting a GBP decline. In addition, they plan on UK yields to fall in reaction. These currency depreciations can have wider trade and FDI spilling effects, too.
As the MPC considers its path forward, it will need to weigh various competing factors: moderate consumer demand against rising unemployment, easing inflation alongside persistent service costs, and impending fiscal policies from the government. These complexities mean the MPC’s upcoming decisions will be especially consequential.