One in three
Until recently, the market had held the probability of a rate cut at the Bank of England’s November meeting at near zero. Above-target inflation and insufficient evidence of faltering economic growth alone suggested the BoE would continue to adopt a wait and see approach. Combine that with the uncertainty of the UK Autumn budget just around the corner and it is understandable why, for a long time, no gap between benchmark rates and gilt prices around the November 6th meeting was observable. The story today, however, is somewhat different.
The market now prices roughly a one-in-three chance of a rate cut this Thursday. The main driver of that change has been inflation reports published in October. These reports appear to suggest fundamental drivers of inflation, as observed through components of services and food price inflation, have peaked. It is likely that this drop in inflation will be sufficient for some on the MPC to cut rates this Thursday. However, these may well still prove to be dissenting votes with the remainder of the Committee more likely to want to see further evidence of peaking inflation from future data.
Overall, it seems more likely that the BoE opts to hold rates this week. However, a change in the composition of votes to become more balanced will be sufficient to show the Bank’s bias towards adjusting rates. This may open the door to a December rate cut, allowing the Bank time to observe the outcome of the Budget later this month. Some of Sterling’s recent weakness can be put down to this adjustment in rates. The BoE’s hawkish summer narrative had been a major supporting factor behind Sterling and appears at least to be faltering. Combined with a resurgent Dollar, itself driven by changing Fed expectations and a tight US money market, Sterling has been losing its shine.
Discussion and Analysis by Charles Porter
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