Thoughts

November 01, 2024 | 13:50

BoE: To Cut or Not to Cut? That Is the Question

Economist

Jennifer Lee

Senior Economist and Managing Director
Economics

Jennifer has been wi... (Read more)

Jennifer Lee

Senior Economist and Managing Director
Economics

Jennifer has been wi... (Read more)

These are wacky times for central banks. Most are easing (BoC, for example), some are hiking (BoJ), and some are just not sure (RBA). Just to complicate things further, one bank’s path became clearer this week, while another’s became fuzzier.

Let’s start with the clearer path. The BoJ, to the surprise of no one, unanimously agreed to hold rates at “around 0.25%” on October 31. But, we continue to stick to our expectation for a December hike. The Statement was short and to the point (likely the shortest one ever, although April’s was close). The forecast for real GDP was raised slightly for Fiscal 2025 to 1.1%, supported by stronger consumer spending, and as the “fog” over the U.S. economy was “clearing somewhat”. The forecast for core CPI was lowered by two-tenths to 1.9%, thanks to lower energy prices, not wages. In fact, it was noted that more firms were raising wages and prices, and that some of these wage increases were spilling over into services inflation. Governor Ueda even mentioned how Tokyo’s latest CPI showed more companies were passing higher costs onto consumers, and that they would take a more “careful look” to see if that was also the case nationwide. Finally, exchange rate developments were, “compared to the past, more likely to affect prices”. And we all know how weak the JPY is these days. Finally, there was one line which hammered the case home: “If the aforementioned outlook for economic activity and prices will be realized, the Bank will accordingly continue to raise the policy interest rate and adjust the degree of monetary accommodation.” It is not often that such clear language is used. All the above reasons strengthen the case for a rate hike in December.

Then there’s the fuzzier path and the BoE is on it as it looks at slower growth (real GDP up around 1% y/y), below-target headline inflation of 1.7% (a near-four-year low), core CPI at a three-year low, and wage growth at a two-year low of 4.9%. Manufacturing is also contracting for the first time in over half a year. All reasons to take Bank Rate down another notch. But the job market is steady, with the unemployment rate at an eight-month low of 4.0%. And, the MPC’s different leanings makes this very complicated. The eight policymakers who voted to keep rates unchanged in September are made up of varying degrees of hawks and doves. For example, Catherine Mann prefers to keep rates higher for longer, and Megan Greene leans in a similar direction. But Governor Andrew Bailey recently mused about how the Bank could be “a bit more aggressive”, or “a bit more activist” on rate cuts, which prompted chatter of a 50 bp move. He has the support of two other dovish-leaning voters, on top of uber-dove, Swati Dhingra. Shortly after, Chief Economist Huw Pill expressed his view that a “gradualist” approach should be taken, and that “Bank Rate will need to fall over time, but at a pace that ensures sufficient restriction is maintained”. It will only take one person to tip the 5-person majority to the cut camp and that one person could be pushed under the weight of the data. We continue to look for the BoE to narrowly vote to cut 25 bps on November 7, but use language suggesting that a pause is forthcoming, given the new complication coming from the Budget.

Note: Our Head EMEA Rates Strategist, Laurence Mutkin, now looks for the BoE to stay on hold, given the contents from the Autumn Budget, and its effects it will have on the BoE’s projections and on inflation persistence. But he is also of the view that it will be a very close call.