Inflation vs. slowdown – Bank of England in a deadlock ahead of next decisions

The Bank of England (BoE) will almost certainly keep its key interest rate at 4%, ending a series of quarterly cuts that has been ongoing since August 2024. The expected 6:3 vote to maintain rates would mean that the decision would be deeply divided, and the vote would take place in a new, more transparent format – for the first time, all members of the Monetary Policy Committee (MPC) will publicly present individual justifications for their positions.

Persistent inflation, which reached 3,8% in September—almost twice the 2% target—continues to worry some policymakers. On the other hand, members of the Committee's more dovish wing, such as Alan Taylor and Dave Ramsden, point to the economic slowdown and the weakening labor market as arguments for further easing.

The bank is likely to lower its inflation forecasts in the short term, but may also revise its economic growth forecasts for 2025 upwards.The upcoming autumn budget, announced for November 26, will also be a significant factor influencing monetary policy – ​​the expected tax increases announced by Treasury Secretary Rachel Reeves may have a disinflationary effect, strengthening the argument for rate cuts in the coming months.

The role of Governor Andrew Bailey is attracting particular attention, as his balanced approach could prove crucial in the event of a close vote. Meanwhile, Deputy Governor Dave Ramsden is expected to join the MPC's dovish faction for the first time, alongside Taylor and Dhingra.

Monetary policy communication reform

The Bank of England is also implementing the biggest reform of its monetary policy communication in years. In addition to the Committee members' individual justifications, a transparent review of its decisions will be published, enriched with analyses of alternative scenarios and responses to potential changes in the policy path. The BoE will likely maintain its current language, emphasizing a "cautious and gradual" approach to further easing financial conditions.

The market expects another rate cut in December or February because interest rates are already approaching a level considered neutral – neither stimulating nor restrictive for the economy. Two key data sets will be released before the December meeting: inflation and the labor market situation, which will have significant implications for subsequent decisions. The pound is gaining slightly today (+0,11%) and is trading at 1,3065.

Source: Krzysztof Kamiński, OANDA TMS Brokers