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Press release
24 Jan 2020 | By Nicholas Wall

BOE: A CUT NEXT WEEK?

Nick Wall comments on the upcoming Bank of England interest rate decision

 

The forecasting community is at a loss as we approach the Bank of England meeting next Thursday, with the market pricing a 50/50 chance of a 25 basis point rate cut.

The focus coming into the year was on demand; with investors anticipating a ‘Boris bounce’ after his landslide election win in December. Indeed, the data has picked up, with the housing market showing signs of life, and today’s PMIs posting the biggest month-to-month gain since 1998 – so why would the Bank cut now?

The arguments for cutting interest rates today are three-fold:

First, as governor Mark Carney alluded to in his The Future of Inflation Targeting speech, the Brexit-related weakness in investment has weighed on the supply capacity of the UK and the Bank can smooth the adjustment to a new trading regime. The monetary policy committee may judge that, with sterling stable, they can loosen policy to prevent labour market slack from opening up – the job vacancy rate, a reliable forward-looking indicator, has been dropping.

Secondly, the Bank may judge that, with limited ammunition, you get more bang for your buck if you move early. Prolonging the business cycle arguably requires fewer cuts than fighting a recession and this policy approach is gaining popularity in central banking circles (arguably out of necessity).

Lastly, the recent inflation readings have been comfortably below target, as global growth weighs on demand. The recent phase one deal between the US and China is a step in the right direction, but future trading relationships are still uncertain, whether they are between the UK and Europe, or the US and China. The recent coronavirus outbreak in China could also impact global growth in the near-term.

On balance, we think the Bank of England probably will cut rates next week as a risk management exercise – but it’s certainly a difficult decision for them to make. 

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