BoE Preview (Dec 18): How Big a Split?
That the BoE will deliver a fifth 25 bp rate cut (to 3.75%) on Dec 18 is almost certain, even after a Budget that did not accentuate current emerging demand weakness. The question is whether the MPC vote will be as close as the 5:4 split seen last month but with Governor Bailey switching sides. However, we think dissents may be less than four this time around unless the November CPI provides a negative surprise. Even hawk Chief Economist Pill may opt for an easing he still openly advocates as long as it is delivered slower than hitherto (as it would). Admittedly, persistent sizeable dissents through 2026 may complicate policy making. But we think those dissents will be tempered as the MPC vast majority recognises the ampler signs of a weaker demand and labor market backdrop. Thus coming alongside emerging but clear signs of both price and wage pressures having subsided markedly. Thus we retain our below-consensus projection of Bank Rate falling to 3.0% by end-2026.
Figure 1: Core and Services CPI Consistent with Target…
Source: ONS, CE
A tight vote was always likely for the November MPC verdict, but the 5:4 split was closer than expected, but almost a repeat of the August decision when rates were cut to the current 4%. What seems clear is that the effective swing voter was Governor Bailey but who coloured his decision with a clear pointer that he was likely to opt for a cut when more data will be available. If so, he has already signalled a willingness to vote for up to three 25 bp cuts given his stressing that he sides with a policy outlook that sees Bank rate falling gradually further to around 3.3% by end-2026 (this according to illustrative alternative paths for Bank Rate under various Scenarios). However, at face value, the close November vote suggests that the two camps within the MPC may remain entrenched in their thinking, effectively meaning that Governor Bailey will be the key, swing voter. If so, this may be something he will find both testing and problematic if he has to wrestle with what could be two intransigent and possibly vocal halves of the MPC.
This a possibility but we instead think that dissents will dissipate into and through 2026. This is based not on any expectation of softer price and wage pressures but a continuation of the clear softening that is now emerging. This is especially so looking as recent adjusted m/m data. Recent such data suggest that core and services CPI numbers may already be running at rates consistent with the 2% target (Figure 1) while wage (earnings) data may have slowed even more markedly (Figure 2).
Figure 2: …As May Weaker Wage Pressures?
Source: ONS, CE
To what degree this reflects what seems to be increasing demand weakness amid clearer signs of labor market loosing, and employment declines is unclear – BoE-compiled survey data suggest private payrolls may have fallen by almost 2% y/y of late! Regardless we think BoE policy is partly to blame. Supporting this view, recent data have shown some slowing in credit growth with household lending just about zero in real terms. Notably, financial conditions seem to be tightening, thereby moving in the opposite direction to conventional policy.
This data backdrop needs to be placed against the BoE currently presented three scenarios. An inflation persistent view shapes the thinking of the MPC hawks while a downside risk alternative is what the dovish camp envisages. But the data backdrop alluded to above is likely to reinforce the latter view that inflation risks have become more balanced due to weaker demand both having occurred and expected, if not tip them to the downside.
Against this backdrop extrapolated through 2026, we see Bank Rate falling to 3.0%. This may be below consensus thinking but is far from being inconsistent with BoE analysis - this now among a series of rules the BoE is formally embracing. Indeed, according to the path suggested by a forward-looking Taylor rule, and which suggest that if the demand weakness scenario plays out. Bank Rate would fall to almost 3%.
I,Andrew Wroblewski, the Senior Economist Western Europe declare that the views expressed herein are mine and are clear, fair and not misleading at the time of publication. They have not been influenced by any relationship, either a personal relationship of mine or a relationship of the firm, to any entity described or referred to herein nor to any client of Continuum Economics nor has any inducement been received in relation to those views. I further declare that in the preparation and publication of this report I have at all times followed all relevant Continuum Economics compliance protocols including those reasonably seeking to prevent the receipt or misuse of material non-public information.