A growing number of economists believe the Bank of England has finished cutting interest rates as policymakers struggle to contain a fresh spike in inflation, a sentiment likely bolstered by fresh jobs data.
Banco Santander SA, Schroders Plc and Pantheon Macroeconomics Ltd. expect the UK central bank to keep rates at 4% for the foreseeable future, with the knife-edge decision to cut in August ending its easing cycle after one year. Nomura Holdings Inc. said further reductions are in doubt if inflation does not come down as forecast.
To be sure, such views are not shared by traders and most economists, who still see one or two more cuts over the next year. However, it reveals just how far sentiment has turned in a matter of weeks after officials ramped up their hawkish rhetoric amid signs that inflation is proving far more stubborn than anticipated.
Economists surveyed by Bloomberg unanimously expect the Monetary Policy Committee to leave rates on hold on Thursday, and officials may use the decision to further dampen the odds of a move in November and beyond.
Money markets, which were fully pricing in rates of 3.75% by December, now see little chance of another cut this year. They are betting on just over 40 basis points of additional easing by the end of 2026, compared with almost 60 before the Aug. 7 meeting.
The BOE needs “to hold onto the restrictiveness it has, to bear down on sticky UK inflation and some of these same cost pressures that are making life tricky for UK businesses,” said Victoria Clarke, UK chief economist at Santander Corporate and Investment Banking.
Jobs market data on Tuesday will do little to appease policymakers’ fears that inflation is becoming more entrenched.
Private sector pay growth — the measure most closely watched by rate-setters — eased to 4.7% in the three months to July, but remains well above the 3% considered to be consistent with the BOE’s inflation target. Meanwhile, there are signs of that the impact of Chancellor of the Exchequer Rachel Reeves’ budget raid on companies is past the worst, with payrolls falling a smaller-than-forecast 8,000 in August. The pound extended gains after the data.
Inflation data on Wednesday will underscore the policy headaches facing rate-setters. Economists expect the figures to show inflation holding at 3.8% in August, a rate last higher in January 2024. It is expected to peak at 4% this month, double the 2% target, with the report set to arrive shortly before BOE officials meet in November.
What Bloomberg Economics Says
“The latest UK jobs figures suggest disinflation still has further to run. Pay growth fell and is on course to undershoot the Bank of England’s forecast, while employee numbers dropped again.
Still, there is some evidence that the pace of labor market loosening is slowing. Together with the prospect of inflation heading to 4% in the coming months, that could see the BOE pause rate cuts until 2026, rather than lower borrowing costs again in November, which is our current baseline.”
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The UK is an outlier among advanced economies. In the US, inflation is below 3% and the Federal Reserve is expected to cut interest rates the day before the BOE decision. In the Eurozone, inflation is just above the European Central Bank’s 2% target.
The prospect of limited further rate cuts from the BOE, or none, will disappoint homeowners counting on cheaper borrowing costs. It will also pile further pressure Reeves, who businesses blame for fanning prices with her sharp increases to employer payroll taxes and the minimum wage.
George Brown, senior economist at Schroders, said markets are still “underestimating the risk that the Bank is done cutting for this cycle.”
“Inflation looks set to remain stubbornly above target both this year and next, making it hard to justify further easing without undermining the Bank’s credibility,” he added.
Soaring food prices are of particular concern for the BOE, given their salience for consumers. Figures last week showing household inflation expectations at a two-year high fueled fears that workers may try to recover lost purchasing power through higher wages — with knock-effects on prices.
Governor Andrew Bailey has insisted that the path for borrowing costs remains downward, with the labor market showing clear sign of weakening. But in evidence to lawmakers this month, he signaled the BOE was minded to slow its once—a-quarter cutting pace after four of the nine-strong MPC opposed August’s rate cut. This week seven are forecast to vote for no change, with two calling for lower rates.
“I do think they will cut again but stronger data prints could easily derail that view,” said George Buckley, chief UK economist at Nomura. “They need more disinflation to warrant more rate cuts in my view.”
Robert Wood, chief UK economist at Pantheon Macroeconomics, said the UK has “an inflation problem,” pointing to higher household expectations, the labor market shakeout easing and GDP growth close to its speed limit.
HSBC Holdings Plc does not expect another cut until April.
Some rate-setters, including Deputy Governor Clare Lombardelli, have signaled they believe borrowing costs are already close to neutral — the level at which they are neither stimulating nor weighing on the economy. Other economists agree.
“I think we’re pretty much at neutral to be honest,” said Andrew Wishart, UK economist at Berenberg Bank, who expects an extended pause on cuts until next year. “At the moment they can’t cut again because inflation expectations are up, inflation itself is up and nominal GDP growth is still pretty stronger.”
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