When words matter more than numbers at the Bank of England
City analysts have pencilled in their predictions for Thursday. Here’s how almost all of them likely read. Interest rates will be cut to 4.25 per cent, the Bank of England’s inflation forecast for this year will exceed its two per cent target and President Trump’s tariffs will be highlighted as a detriment to UK growth. The Treasury will celebrate the cut and list off its plans to drive higher growth.
In a world of flimsy policymaking and flakey objectives, the predictability of what the Bank’s Monetary Policy Committee (MPC) will conclude at its next interest rates decision on Thursday may be refreshing. But it’s certainly not reassuring.
Amid the patchy data points and vague comments on “geopolitical uncertainties” and “financial market volatility”, forecasters will be trying to figure out whether the Bank will speed up its rate-cutting cycle or continue its more cautious approach.
“The interesting thing for us will be the way they signal a more aggressive policy, if they do so,” Oxford Economics’ Andrew Goodwin told City AM.
“I wouldn’t say we were particular fans of this word salad they were using last time, that ‘careful and gradual’ [phrasing]. Certainly, I don’t think we think it’s particularly important or a particularly good way of signaling things. But obviously the MPC thinks it is a very important way of doing it.”
“If they change those two words, if they knock one out or if they change one to another word, then that is probably a sign that they’re trying to signal something.”
One victim of the Bank’s phraseology shake-up could be its references to gradualism, which could be on the way out, according to Oxford Economics, a view shared by Deutsche Bank’s Sanjay Raja.
The Bank of England’s recent difficulties in controlling inflation, which surged to as high as 11 per cent in October 2022 in the wake of Russia’s full scale invasion of Ukraine and Liz Truss’ short stay in Downing Street, have made rate-setters more reluctant to do anything that exacerbates price growth.
Whereas the Bank of England has cut interest rates to 4.5 per cent from a high of 5.25 per cent last July, the European Central Bank (ECB) has moved at a faster pace, making seven 25 basis point cuts in just over 18 months.
Bank to stick to ‘gradual and careful’?
If surging energy prices and a deterioration in the pound led to some headaches at the Bank nearly three years ago, President Trump’s tariffs may leave rate-setters with migraines.
Economists will be extremely sensitive about what a breakdown in global trade could do to prices, having seen the inflationary effects on price growth during the pandemic.
But a wave of Chinese goods flooding into the UK to sidestep sky-high import taxes of 125 per cent could lower prices.
But while it was possible the Bank would “strike a more dovish tone”, it would still be worried about near-term inflation risks, according to Ruth Gregory, deputy UK economist at Capital Economics.
“I think there may be some wording in the policy statement that it may want to wait for greater clarity about the influence of the trade war on inflation and it probably won’t drop its existing guidance that rate cuts will be gradual and careful,” Gregory said.
The Bank of England’s decision in March said inflation would peak at around 3.75 per cent this year, far higher than that pencilled in by leading City forecasters and the fiscal watchdog, the Office for Budget Responsibility (OBR).
“It may forecast a slightly lower peak, but there’s still a risk there that there could be second round effects that inflation could linger for a bit longer in the near term, particularly given the evidence that we’re seeing on things like the the higher employers’ national Insurance contributions and the national minimum wage” Gregory said, adding that the manufacturing PMI output balance is consistent with a near-term rise in goods inflation.
City forecasters have priced in up to four rate cuts by the end of the year. Banking giant Morgan Stanley believes interest rates could drop as low as 3.25 per cent by the end of the year, which would represent the lowest cost of borrowing since December 2022.
Latent within such forecasts are some analyst efforts to nudge MPC members into accelerating interest rate cuts. An average of ten forecasters see UK growth dropping below one per cent this year. The Bank projected UK growth to hit 0.75 per cent (rounded to the nearest quarter decimal) long before Trump’s ‘Liberation Day’.
Bank of England Doves vs hawks
Despite the bleak assessment of the UK economy’s sluggish growth, hawkish views may yet hold. Former rate-setter Jonathan Haskel told City AM last month he would vote to hold interest rates due to high price growth in services.
Surprises this Thursday will surely come through those who vote to hold rates or propose a more aggressive cut. Pantheon Macroeconomics, for example, believe that Swati Dhingra and Catherine Mann will go for a 50 basis point cut on Thursday, which could reflect an underlying sentiment that tariffs will damage demand more than they might curb supply in the UK economy.
| Hawks to doves ranking | Who are the black sheep? |
| 1. Megan Greene – External member | Voted to raise interest rates in late 2023 when a hold was agreed and has previously warned against fast interest rate cuts. Has publicly said that tariffs are likely to have more of a disinflationary effect though higher taxes could keep price growth high. |
| 2. Sarah Breeden – Deputy governor | Said in April that history showed policymakers needed to be more careful about cutting rates and that it was too early to say whether Trump’s tariffs would weigh down on inflation. |
| 3. Huw Pill – Chief economist | Leader on consensus as Bank’s chief economist, and likely to lead the pack in a 25 basis point cut. Said as recently as February the Bank had to remain cautious. |
| 4. Clare Lombardelli – Deputy governor | Likely to vote with colleagues as she has said the downside risks to growth from tariffs were clear. |
| 5. Andrew Bailey – Governor | Has appeared to say that tariffs will have a deflationary effect on UK prices unless the Labour government chooses to retaliate. |
| 6. David Ramsden – Deputy governor | Appeared to drop his dovish stance with comments in February this year claiming higher wages could push up inflation. Voted to cut rates in May 2024 when the MPC agreed on a hold. |
| 7. Alan Taylor – External member | Newest member on MPC who said the Bank should accelerate interest rate cuts if there were risks to the downsides. He has not voted against consensus. |
| 8. Catherine Mann – External member | Voted for a 50 basis point cut in February alongside Swati Dhingra and could do so again as she has called for a more active approach. |
| 9. Swati Dhingra – External member | Tipped to vote for a 50 basis point cut by various forecasters.n Only member to vote for a 25 basis point cut in March this year. |
Economists will also be looking closely at the Bank’s two new inflation scenarios, which replace a previous structure of three models. Policymakers will hypothesise whether there could be “greater or longer-lasting weakness in demand relative to supply” and whether there could be “persistence in domestic wage and prices”.
Goodwin suggested that these new evaluations will likely reflect the Bank’s view on how tariffs may affect the UK economy given the immediate absence of reliable trade data and volatility in the value of the pound and global energy prices.
“At the moment, it’s sort of concepts rather than something they could actually validate with hard data,” he said.
The data rate-setters do have at their disposal are energy prices and foreign currency exchange rates, which point to deflationary effects on price growth. Brent crude, a global benchmark for oil prices, hit a four-year low on Monday after OPEC+ agreed to increase production. Meanwhile, the pound rose against the dollar on Monday, reflecting the continued slump in the value of the US currency.
Markets are bumpy but the relative dearth of information available may push Bank of England economists to take these data points into account. In fact, some of the most vigorous language in the minutes from the MPC interest rate meeting may be set aside for exactly that: complaining about the Office for National Statistics (ONS) ability to publish accurate information given its tendency to revise key estimates and failure to properly keep up with crucial labour market data.
Trends can also turn on their heads. Retaliatory tariffs or higher trade barriers set by the UK government could thwart the Bank’s plans to hit inflation by the end of next year. But so far the Treasury looks reluctant to stoke trade tensions further.
Some analysis may be too technical and complicated for policymakers to consider, while imagined scenarios definitely can’t foretell President Trump’s next move. For the most part, MPC members are working in the dark. All they can do now is try to provide some clarity.