The Bank of England’s Monetary Policy Committee (MPC) may face significant decisions regarding interest rates as the upcoming Budget looms. Analysts suggested a significant net tax increase in the Budget would make it easier to argue for an interest rate cut in December. They highlight that these tax increases can’t add to inflation. The market now largely prices in a frontloaded drop in the fed funds rate all the way down to 3.75%. The odds of this actually occurring are roughly one in three.
Andrew Bailey, the newish governor of the Bank of England, thinks further interest rate slashes may be coming. He’s optimistic moving forward as he makes adjustments. Though at the same time, he recognized that the speed of these changes would be “more unpredictable” than previously. The MPC now has nine members. For the first time, they’ll publish their very own dissenting or concurring opinions together with the final decision. This unprecedented transparency is intended to be a helpful window into the committee’s internal deliberations and diverse member perspectives.
The inflation rate in September was 3.8%, well above the Bank’s target of 2%. In this positive environment, consumer food and beverage prices continued to moderate. Or in the case of rent, they’ve accelerated at their slowest pace in more than a year. Most savers are “demoralised” by falling savings rates. High inflation rates are eroding their spending power, noted Rachel Springall.
Substantial numbers of lenders are reacting to this challenging economic backdrop by lowering fixed rates on new fixed deals. This expansion reflects their expectation of future central bank rate cuts and increasing customer competition.
“The odds are still firmly in favour of a hold.” – Danni Hewson, head of financial analysis at AJ Bell
Market watchers expect to see a divided vote from the nine-member MPC commission as they deliberate their next move. AJ Bell financial analyst Danni Hewson made the point. If the Budget brings in large tax increases, it might make the case for a cut in the rate stronger.
Shadow Chancellor Rachel Reeves has called on the Bank of England to focus solely on tackling inflation. She wants them to set the stage for interest rate cuts. Political discussions are starting to get really tense. Reeves’ unusual press conference was likely designed to prod the state’s central bank into action, some have speculated.
“It’s possible Rachel Reeves’ surprise press conference on Tuesday was partly a cry for help to the Bank of England.” – Danni Hewson