91探花

Despite a bumper 50 basis point (bps) cut from the Fed yesterday, the Monetary Policy Committee (MPC) chose to keep interest rates at 5.0% today, as widely expected. But a rate cut in November looks like a sure bet, and it is increasingly likely that there will be a rate cut in December as well, especially if the Fed continues to ease policy this year as expected.

No need to rush

At the August MPC meeting, the committee made clear that further rate cuts would be gradual and cautious. It continued that approach today, adding the line to the minutes: “In the absence of material developments, a gradual approach to removing policy restraint remains appropriate.” This is essentially a different way of saying interest rates will be cut gradually unless there is a concerning development with inflation.

The MPC also decided to keep its Quantitative Tightening (QT) envelope at £100bn over the next year. That is important for the Chancellor and the budget as it implies just £13bn of active sales against an Office for Budget Responsibility (OBR) forecast of £48bn. Depending on how the OBR forecasts future QT, the difference could shave some £2bn from her already wafer-thin headroom margin against the current fiscal target and makes it even more likely that she will opt to change the definition of debt used in the fiscal rule. Using Public Sector Net Debt (PSND), instead of the current metric that excludes the Bank of England (BoE) (PSNDex), could also free up around £16bn based on the March OBR numbers.

What next?

Our base case is that the MPC cuts once more this year, in November, but the chances are growing stronger that there will be another cut in December.

If services inflation continues to undershoot the MPC’s forecast and the economy slows in line with the committee’s expectation, that could be enough to prompt a cut in December. What’s more, if the Fed loosens policy aggressively, this would give the BoE more cover to also cut rates more aggressively. A “painful” budget may also give more room to lower interest rates.

Overall, the policy easing cycle has begun, but it will continue only gradually, unless the inflation and wage data slow dramatically. We expect interest rates to finish the year at 4.75% or 4.5% and end 2025 at 3.5%.