Economists are pretty unanimous, and for once, the market agrees that the BOE will cut rates at Thursday’s meeting. The issue is that usually, with such agreement, the focus for markets is guidance for the next meeting. However, there is considerable disagreement about what to expect for the rest of the year. And some of that disagreement comes from within the BOE itself.
The BOE is facing a situation that is complicated for any central bank: Slow economic growth and high inflation. The question is which of those issues will prevail when it comes to setting monetary policy. And it appears that some MPC members are more inclined to worry about the economy, while others are more inclined to worry about inflation. This has led some analysts to speculate there could be a (rare) three-way vote split.
Where the Vote Goes
The straightforward situation is that the majority votes in favour of the policy, and a smaller number votes for an alternative policy. The difference in votes then allows analysts to speculate on the likelihood of a policy change at the next meeting. The theory is that the higher the number of dissenters, the more likely it is that the minority opinion can become a majority by the next meeting.
But with a three-way vote, that’s more difficult. In the case of Thursday’s meeting, the widely accepted consensus is that the majority will vote to cut rates by 25 bps. There is a pretty solid expectation that eternal dove Swati Dinghra will vote for a 50 bps cut. The question is how many other MPC members join her, which would give an idea of how prevalent the idea of speeding up rate cuts is.
Reasons Not To Cut
There have been some MPC members who have expressed concern about rising inflation. This has left speculation that at least one might vote in favour of keeping rates unchanged, creating a three-way split. Some have speculated that Catherine Mann could return to her hawkish views and be at least one vote to hold. This would leave markets with the impression that the BOE is more hawkish than thought.
However, that likelihood of a hold might not lead to increased strength in the pound. That’s because traders are worried about the UK’s finances, and higher rates would exacerbate that problem. That could mean investors could increase their sales of sterling-denominated assets and weaken the pound.
A Change in the Outlook
The other element that could shake up markets is that the BOE is expected to update its economic projections for this year. Its prior forecasts predicted inflation would peak at 3.7% in the third quarter of this year and then start declining to hit the target by the end of 2026.
But inflation was last reported at 3.6%, meaning the BOE may raise its CPI growth forecasts. This would likely be interpreted as hawkish, as it could mean a delay in the next rate cut. For now, the consensus among economists is that there will be a 25 bps reduction in November. If the BOE is hawkish enough, it could delay expectations for a rate cut into next year.