There is a unanimous consensus among economists that the BOE will keep rates unchanged at Thursday’s monetary policy decision. What could shake up markets is if the vote split and minutes of the meeting change expectations for the future rate trajectory. This comes after the pound fell to its lowest level since April amid concerns about the British economy.
Ahead of the rate decision, Chancellor Rachel Reeves delivered an unusual pre-Budget speech, apparently attempting to reassure markets and lay the groundwork for the Autumn spending plan, which will be announced on November 26. Reeves refused to rule out raising taxes again, which is a particular concern for the market. The contents of the Budget might influence monetary policy forecasts and shake up the currency as well.
How the BOE Could Move the Markets
Typically, when the BOE won’t change its policy, it doesn’t schedule a post-rate decision press conference for Governor Andrew Bailey. No press conference is scheduled for Thursday, which means that if there is a rate cut, it will be a surprise to the BOE itself.
That means that the potential impact on the market could come from the vote split. Markets are currently not expecting a rate cut until next year. However, if a large number of MPC members vote to reduce rates on Thursday, it could mean that a rate cut may come sooner than expected. On the other hand, if there are fewer votes for a cut, then the market could interpret it as a sign that the BOE has become more hawkish. MPC member Swati Dhingra reliably always votes for a rate cut, so it’s a matter of counting how many other members join her in the vote.
Why Can’t the BOE Cut Rates?
Britain’s central bank is facing a difficult position due to high inflation and sluggish economic growth. The CPI rate was last recorded at 3.8%, which is well above the 2.0% target. Typically, a central bank can lower the inflation rate by slowing the economy through higher interest rates.
However, the UK’s sluggish growth means that the BOE can’t take this option. In fact, it is under considerable pressure to cut rates to support the economy, after the first two months of Q3 showed nil growth. The main culprit for this situation of high prices and sluggish growth is understood to be last year’s Budget that raised taxes. The budget made it more expensive to hire people, increasing costs for consumers and also making businesses less profitable, which in turn slowed the economy.
Why the Market is Concerned About the Budget
The UK government faces a £44 billion shortfall, and it’s up to Rachel Reeves to figure out how to cover that. The Chancellor has pledged not to raise taxes and not increase debt, as both would be detrimental to the economy.
Businesses are concerned that she may opt to raise taxes, despite her promise last year not to do so. This could exacerbate the high inflation, low growth situation, forcing the BOE to keep rates unchanged for an extended period. Without a return on investments, investors might be increasingly reluctant to invest in pound-denominated assets, which would reduce demand for the currency and weigh on the GBPUSD.