Surprise rate cut? – Mortgage Strategy

Bank of England rate-setters could surprise markets by cutting the base rate by a quarter point to 3.75% from 4% next week, say a range of major banks.

Goldman Sachs says a weaker economy, lower inflation forecasts and lower wage rises are among the factors that may lead the Bank’s Monetary Policy Committee to cut the cost of borrowing at next Thursday’s meeting.

The US bank predicts a 5-4 vote for a 25 basis points cut, with governor Andrew Bailey, Swati Dhingra, Alan Taylor, Sarah Breeden and Dave Ramsden voting for the move.

Inflation unexpectedly remained at 3.8% for the third month in a row in September, when it had been expected to hit 4%, official data showed last week.

Average wage growth was 4.7% in the three months to August, the latest data showed, down from 4.8% over the three months to July.

While the UK economy grew by 0.3% over the three months to August.

Goldman Sachs analyst James Moberly says: “Taken together, we believe that the data make a convincing case for a cut next week, as key indicators have turned out significantly weaker since the September meeting.”

At that meeting, the MPC voted 7–2 last month to maintain Bank rate at 4%, with just Alan Taylor and Swati Dhingra pressing to cut the interest rate by a quarter point to 3.75%.

Barclays and UniCredit also say a cut may be on the cards next week.

UK chief economist Jack Meaning points out: “Back in September, the committee was weighing up the balance of risks on both sides of its inflation outlook.

“We think the data since then, as well as signals of future fiscal policy changes, will have shifted that balance, leaving the committee more confident that disinflation is underway.”

Economists point to the division of opinion on the MPC over whether rising inflation is due to temporary hikes in food and energy costs, or down to longer-term services and wage costs.

Earlier this month, the Bank’s chief economist Huw Pill, who also sits on the MPC, said high services prices and wages had made inflation much more “sticky” than Bank policymakers had previously forecast

Pill added: “While I would expect further cuts in Bank rate over the coming year should the economic and inflation outlook evolve broadly as the MPC expects, it will continue to be important to guard against the risk of cutting rates either too far or too fast.”

Deutsche Bank chief UK economist Sanjay Raja argues that although the MPC decision will be “finely balanced,” the committee will hold the base rate at 4%.

Raja adds: “We think the centrists on the MPC will want to see three things before dialling down restrictive policy again: one, a turn in inflation expectations; two, details around the inflationary impact of the Autumn Budget; and three, and most importantly, signs that pay settlements are tracking closer to 3%.”