The LSEG is suggesting that the market is pricing in a near-certainty of a hold being delivered by the Bank on Thursday. Recent economic data has not been overly revealing, with GDP for the third quarter in line with the MPC's predictions and both inflation and wage growth having fallen short of expected levels, as well as domestic demand being weak. Barclays anticipates the MPC to be divided in their decision making, yet keep their language assertive by contesting the market's pricing of "precipitous" cuts.
The Bank of England is all-but-certain to maintain its primary interest rate at 5.25% at their upcoming Thursday meeting; nonetheless, economists are divided over when to expect the first cut in the coming year. LSEG indicates that the market is pricing a nearly definite hold this Thursday; however, economic data from when the Bank last met has been indecisive. Real GDP growth for the 3rd quarter was the same as the Monetary Policy Committee's predictions, whereas inflation and wage growth have lagged behind expectations and domestic demand has been weak. UK headline inflation dipped to 4.6%, its least in 2 years, in October. Labor market figures that were revealed on Tuesday demonstrate that the current trends are persisting, with unemployed numbers being approximately stable and job openings decreasing at a steady speed. PwC Economist Jake Finney commented in an email Tuesday that this verifies the theory of some US Federal Reserve officials that with job availabilities being so high, adding slack into the labour market shouldn't significantly raise unemployment. The average pay, including bonuses, decreased by 1.6% between September and October, compared to the average monthly growth of 1.1% in the first half of 2019.
Finney pointed out that once inflation is accounted for, wages are still rising year-on-year as the worst of the nation's cost of living struggles are receding for the average family. This along with new evidence of a cooling labor market likely brought some level of comfort to the Monetary Policy Committee (MPC) prior to their Thursday meeting, despite no major surprises in current financial data. Barclays believes the MPC will go ahead with a vote to maintain the current stance, yet retain their hawkish tone in countering the market's early predictions for a rate reduction in August 2024. The bank's economists, Abbas Khan and Jack Meaning, highlighted the MPC's likely continued position that the current monetary policy is "restrictive", given growing indications of its effects on economic activity and the labor market. Furthermore, their unchanged forward guidance will also aid in contesting markets that are already pricing an increasing probability of cuts in early 2024.
We predict that the Bank Rate will reach 3.25% by Q2 2025, initiating the cutting cycle in August 2024. On the other hand, the U.S. Federal Reserve and the European Central Bank may influence the Monetary Policy Committee to begin the Bank Rate slashing earlier if sterling strengthens and brings inflation under the Bank's 2% target sooner and to a greater extent. However, the current level of inflation, particularly in services, and rate of wage growth makes it improbable that the MPC will turn dovish before May 2024.As the Christopher Waller and Isabel Schnabel of the U.S. and European Central Banks have opted for more dovish stances, the Bank of England's more centrist authorities, Governor Andrew Bailey and Chief Economist Huw Pill, have stated that this is too soon to talk about cuts, while the more hawkish members have gone on to express worries about potential inflationary forces.BNP Paribas European economists Paul Hollingsworth and Matthew Swannell assume the Bank of England will be compelled to stay in restrictive territory on Thursday, which will be relayed through the vote split, guidance and any post-meeting communication. Nevertheless, the two believe both growth and inflation will be weaker than the BoE predictions for H1 2024, bringing about a first cut in June 2024 and pushing the Bank Rate to 4.25% by the end of that year.
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