Having cut the UK base rate six times in the current cycle, rate setters on the Bank of England’s Monetary Policy Committee (MPC) will be wary of opting for a seventh easing. However, with inflation widely expected to fall sharply from April and settle at lower levels, the door is certainly open to cuts in the near future.
The MPC has been guarded in both the language used to accompany earlier rate cuts and in relation to future prospects. December’s easing was typical in this regard, with the statement explaining that while policy remains on a “gradual downward path”, future judgements will become ‘a closer call’.
The 9-person MPC has hardly sung from the same hymn sheet for many months and December was no exception. In a 5-4 vote in which Governor Andrew Bailey sided with the doves, members emphasised that future rate cuts would likely be harder earned and slower paced. This articulation is natural as the base rate descends to a more neutral level. Furthermore, prevailing inflationary pressures have not yet dropped to levels which would see more hawkish committee members drop their guard.
Economic data released since December’s rate cut generally confirm that near-term caution is warranted. CPI inflation has nudged up, and a further softening in the labour market and rebound in economic activity is expected. However, persistently sticky wage data will likely prove decisive in a less divided decision this time.
Beyond the rate decision, focus will be on updated economic forecasts. Whilst likely guarded in relation to the near-term outlook for pay growth, estimates will surely show that CPI inflation will hit its 2% target over time. The key moment in the immediate future will be confirmation that regulatory and other price adjustments from April 2025 will drop out of annualised calculations this year. This should result in CPI inflation dipping below target sooner than the Bank anticipates, providing scope for easier policy in months to come.”
By Jeremy Batstone-Carr, European Strategist at Raymond James Investment Services
