Bank of England Rate Cuts: Divided MPC, Economic Outlook, and Sterling Forecast

Bank of England's Divided Monetary Policy Committee

• 🏦 The Bank of England cut interest rates to their lowest in over two years, but for the first time in history, required a second vote to reach a decision.
• ❓ Governor Andrew Bailey cited genuine uncertainty about the economic outlook as the reason for the division among MPC members.
• ⚖️ This division stems from a tension between the stickiness of inflationary pressures and the weakness observed in the labor market.

Inflationary Pressures and Rate Cut Rationale

• ⏳ Monetary policy acts with a lag, so waiting until inflation returns to the 2% target before cutting rates risks overshooting the target.
• 🎯 The MPC focuses on inflation in the medium-term (18-24 months ahead), and current forecasts suggest inflation will return to 2% within this horizon.
• 📉 Market expectations for rate cuts to 3.5% support the continuation of further rate cuts.

Future Rate Cuts and Economic Indicators

• 🔮 BNP Paribas forecasts one more cut in November and an additional cut in February next year, aiming for a terminal rate of 3.5%.
• ⚠️ Risks are skewed towards a slower pace of rate cuts, influenced by evidence of weakening supply-side economics and rising inflation expectations.
• 📊 Fiscal policy announcements in the next budget are also a key consideration; fiscal consolidation would support further easing.

Quantitative Tightening (QT) and Bond Sales

• 📉 The Bank of England's long-dated bond sales risk straining the gilt market, influencing the QT decision in September.
• 🛑 A reduction in the QT envelope is considered