BoE: no rush to cut again

One cut per quarter: Following a first reduction in August, the Bank of England (BoE) maintained its quarterly cadence of moves today by cutting its bank rate from 5.00% to 4.75% . The BoE also re-iterated existing guidance that it will take a “gradual approach to removing policy restraint”. This suggests that policymakers plan to stick to that pace. Only the hawkish outlier, Catherine Mann, did not agree with the cut and preferred to keep interest rates unchanged.

Forecast change: The MPC called the loosening of fiscal policy announced in the 30 October budget “material news” that pushed up their 2025 GDP growth forecast from 1.0% yoy to 1.5% yoy - see Table. Unlike in August when the BoE’s forecast showed spare capacity emerging and inflation falling below target in 2026, it now projects the economy to be at capacity until 2026 and inflation to stay above the 2.0% target until 2027.

Note, though, that the BoE bases its new projection on pre-budget interest rate assumptions, in which Bank Rate is reduced to 3.75% by end-2025. Investors now only anticipate Bank Rate will fall to 4.00% or 4.25% by then – see Chart. Based on current interest rate expectations we suspect that the BoE would forecast that inflation would be slightly below target in two years’ time.

No rush to cut: The forecast may send a slightly more hawkish than the MPC intended but the tone of the minutes was hawkish, in our view. Little weight was put on the fall in CPI inflation to 1.7% yoy in September, which was below the BoE’s forecast of 2.1%. Instead, the statement attributed the undershoot to lower goods price inflation. “Disinflation in underlying services prices”, which it is most concerned about, was “less pronounced”. There was no urgency to cut because of slow growth either – the MPC said there was little sign of demand falling below supply, or the high level of rates becoming more of a headwind to economic activity.

The special relationship: The BoE did not mention the US election in its statement. We expect the impact on the UK to be broadly neutral in the near term. Whereas we have downgraded eurozone growth in 2025 by 0.1ppt on concerns about president elect Trump imposing tariffs on imports, we kept our UK forecast unchanged – see “Forecast changes: the impact of Trump”. That’s because services, which are not typically covered by tariffs, account for over half of UK exports compared to one third of EU exports. Moreover, stronger US growth and a stronger dollar will offset the reduction in external demand that would result from tariffs to some extent.

Berenberg view: We continue to think that, with the labour market at capacity, strengthening demand in 2025 will cause inflation to be more stubborn than the BoE anticipates – see Table again. Against a backdrop of improved growth and above-target inflation, we forecast that the BoE will keep Bank Rate on hold at 4.25% after two more cuts. That marks us apart from the consensus among economic forecasters, which is that interest rates will be reduced to 3.5% by end-2025 (see Chart again).

Table: BoE, Berenberg and consensus economic forecasts

GDP and CPI inflation in % yoy. Unemployment rate in %. Sources: BoE, Bloomberg, Berenberg.

Andrew Wishart

Senior UK Economist

+44 20 3753 3017

andrew.wishart@berenberg.com

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