Bank of England expected to hold interest rates as investors await November cut

Pedro Goncalves

The Bank of England (BoE) is all but certain to hold rates at 5% this Thursday, having cut in August for the first time in four years, but investors expect rate setters will set the stage for a November cut.

Inflation remained stubbornly above the Bank of England’s 2% target last month, official figures show. The consumer prices index was unchanged at 2.2% in August, according to the Office for National Statistics (ONS).

Threadneedle Street is treading more carefully towards lower interest rates than the US Federal Reserve, which slashed interest rates by a half percentage point on Wednesday and charted an expected course for two additional cuts this year followed by four more in 2025.

Fed chair Jerome Powell said the super-sized cut was "timely" and "a sign of our commitment not to get behind." The decision puts the central bank’s benchmark rate down by 50 basis points in a new range of 4.75% to 5.0%.

“The tone of the August meeting and subsequent speeches have made it abundantly clear that officials don’t want markets running away with the idea that this is going to be a rapid easing cycle,” said James Smith, economist at ING.

Speaking at the Jackson Hole summit of central bankers in the US late last month, BoE governor Andrew Bailey struck a cautious note.

“The second round inflation effects appear to be smaller than we expected,” he said. “But it is too early to declare victory.”

Of 65 economists surveyed by Reuters, all expected the BoE to hold rates steady at 5%.

Investors are expecting a vote split, with dovish Monetary Policy Committee (MPC) member Swati Dhingra pushing for a cut.

“We anticipate Dhingra likely advocating for a 25-basis-point cut, while deputy governor Dave Ramsden might vote with the majority this time,” Althea Spinozzi, head of fixed income strategy at Saxo, said.

“This week’s BoE meeting will mark Alan Taylor’s first as he steps in to replace Jonathan Haskel. While his policy stance remains unclear, we anticipate that Taylor will vote in line with the majority at his first meeting,” she added.

Read more: Pound pushes higher against dollar as aggressive US interest rate cut expected

Deutsche Bank sees a 7-2 vote tally, with risks skewed to a 6-3 vote count for a hold.

Economists at Nomura said the BoE's close 5-4 vote in August and healthy business surveys pointed to a hold this Thursday.

"We see the MPC skipping this month's meeting and cutting interest rates again only in November," they said, adding that Dhingra was likely to be the sole voice for a cut this time.

Money markets indicate there is only a 14% chance that the Monetary Policy Committee will reduce borrowing costs, down from 25% before the inflation figures were out.

"The UK has still got much higher wage inflation, much higher services inflation and the best growth across the G10 for the first half of this year," said James Rossiter, head of global macro strategy at TD Securities.

"It's hard to envision a world where the MPC looks at that macro backdrop and thinks that they should be cutting as fast as the Fed."

Read more: UK inflation rate holds steady at 2.2% ahead of interest rate decision

Traders are betting there is an even smaller chance of the Bank of England cutting interest rates today after services inflation rose from 5.2% to 5.6%.

"While there is little chance that the MPC will cut interest rates tomorrow, we think the chances of getting two cuts towards the end of the year are rising," Thomas Pugh, economist at RSM UK, said.

Suren Thiru, economics director at ICAEW, said: "An interest rate cut on Thursday is looking unlikely with the majority of the Monetary Policy Committee likely to want to assess the impact of next month’s budget before deciding when to loosen policy again."

"Monetary policy will need to continue to remain restrictive for sufficiently long until the risks to inflation returning sustainably to the 2% target in the medium term have dissipated further," the BoE said in the statement accompanying its 1 August rate cut.

"The [MPC] continues to monitor closely the risk of inflation persistence and will decide the appropriate degree of monetary policy restrictiveness at each meeting."

Sanjay Raja, senior economist for Deutsche Bank, said that “despite cutting rates in August, the MPC struck a more cautious tone around inflation risks — something that will likely stick in September”.

He also thinks the Bank will keep rates the same this Thursday but then reduce them again in November.

Similarly, AllianzGI believes the BoE will leave the door open for future cuts. “We expect the BoE to signal its desire to ease policy further at subsequent meetings this year and into 2025,” said Ranjiv Mann, senior fixed income portfolio manager at AllianzGI.

Andrew Goodwin, chief UK economist for Oxford Economics, said most members of the MPC are “likely to be content to sit back and reassess the situation in November, a meeting at which the MPC will update its forecasts to incorporate the impact of the budget”.

“We think that fiscal event will be the factor most likely to push the MPC off the gradual loosening path that it advocated in August,” he said, meaning it could start cutting rates more quickly.

Interest rate futures are pricing in two more cuts, in November and December, to put the end-year rate at 4.5%.

"Having multiple data points to really assess how fast and how speedy the disinflation narrative is building in the UK, that's something we don't think we will get until the November decision," said the chief UK economist at Deutsche Bank.

Nearly 80% of economists polled by Reuters, 49 of 65, expected one more cut this year. While 48 predicted it in November, one said December. The other 16 saw two more rate cuts this year.

Meanwhile, the consensus numbers suggest three 25 basis-point rate cuts this year for the Fed, with a further 125 basis points next year.

Read more: US Federal Reserve expected to cut and Bank of England set to hold interest rates

“Our view is 100bp of cuts this year with another 100bp next year. So, if they do a 25bp cut next week, that implies a 50bp move at either the November or the December FOMC meetings with 25bp of cuts at the first four FOMC meetings of 2025, leaving the Fed funds upper bound at 3.5%,” ING analysts said.

Analysis by research firm Capital Economics suggests UK rates will hit 4% by the end of 2025.

"We have to be careful not to cut interest rates too much or too quickly," it said in the 1 August statement. The BoE forecasts interest rates being around 3.5% in the latter half of 2027.

The BoE has been more cautious than other central banks in keeping interest rates high to bring down inflation, which has led to some criticism as higher borrowing costs squeezed UK households and mortgage holders.

The European Central Bank (ECB) has also moved faster than the BoE, after it cut interest rates in the Eurozone earlier this month — the second reduction in a row. The ECB’s rate-setting council lowered the main deposit rate from 3.75% to 3.5%.

The BoE's decision to keep rates steady at 5% will impact UK mortgage holders. Homeowners with variable or tracker rate mortgages should see their monthly payments remain at current levels, providing some relief from the uncertainty of further rate hikes.

However, those on fixed-rate mortgages may still feel the effects of previous increases when they come to remortgage, as lenders continue to factor in the current economic outlook and BoE policy.

Higher interest rates in recent months have led to increased borrowing costs, with many households seeing their mortgage payments rise substantially.

“Regardless, interest rates are expected to end the year at 4.5% — signalling two successive cuts before Christmas," Laura Suter, director of personal finance at AJ Bell, said. "That would be the best present that wannabe homeowners could get, with a mortgage rates war already hotting up. More interest rate cuts could put fire-starters under the housing market once again, which has already seen activity pick up since last month’s cut.”

Read more: Gold hits record high as investors anticipate major US Fed rate cut

“Equally, a hold to interest rates this month might mean that some buyers decide to delay their house buying journey until later this year, in anticipation of lower interest rates,” she added.

Paul Heywood, chief data & analytics officer at Equifax UK, warned that affordability issues would remain a problem without a rate cut.

“With house prices also at a two-year high, home buyers, whilst hopeful for another cut, will be grateful for no further rate increases and start to feel the benefit from relief in mortgage rates. Nonetheless, affordability remains a significant challenge for consumers, as average repayments on new lending remain 53% higher than levels observed in January 2022.

In a big week for central banks around the world, the Bank of England will announce its decision on Thursday at noon in what will be the last MPC meeting before the autumn budget, due 30 October.

Elsewhere, the Fed will announce its long-awaited decision on US rates on Wednesday evening, UK time.

Brazil’s central bank is scheduled to hold its next policy meeting across Tuesday and Wednesday. Norway’s Norges Bank and South Africa’s Reserve Bank will all follow on Thursday.

The week of central bank decisions will culminate on Friday, when the Bank of Japan wraps up its two-day meeting.

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