(Original title: The Bank of England may cut interest rates by 25 basis points this week. Budget easing and Trump’s election victory are key variables)
Zhitong Finance APP has learned that the Bank of England is expected to cut interest rates by 25 basis points to 4.75% at this Thursday’s meeting. This is the second interest rate cut after an unexpected slowdown in inflation. However, the decision was influenced by both the UK budget and Trump’s election victory, complicating the path forward for borrowing costs. The Monetary Policy Committee’s vote is expected to be almost unanimous in support of a rate cut, but the announcement of the budget and the outcome of the US election may lead to increased uncertainty about rate changes. The Bank of England’s decision will be announced at 12 noon London time, followed by a press conference hosted by Governor Andrew Bailey.
It is understood that the Bank of England’s interest rate decision is affected by two major factors at home and abroad. First, Chancellor of the Exchequer Rachel Reeves last week announced one of the biggest fiscal easing measures in decades, which is expected to lead to higher inflation in the coming years. The Bank of England will also become the first major central bank to react to Trump’s victory in the US election. Trump’s victory may trigger a new trade war and have an impact on the global economy.
Figure 1
This policy may force the Bank of England to re-evaluate its pace of interest rate cuts, as increased public investment and repairs to public services will require an additional 30 billion pounds (about 38.7 billion U.S. dollars) of borrowing, which may prevent the central bank from taking more aggressive interest rate cuts.
Economists warned that the budget could push interest rates 50 basis points higher than the stimulus plan, making it difficult for the Bank of England to keep up with the pace of easing elsewhere.
Secondly, Trump’s election victory may have an impact on the global economy through a new round of trade war, which may also affect the Bank of England’s decision-making.
While it is too early to factor the impact of new trade tensions into forecasts, rising bond yields resulting from a Trump victory could weigh on the economy by tightening financial conditions. In addition, Trump’s tariff increases and tax cuts may increase inflation and make it more difficult to cut interest rates.
Still, economists expect the nine members of the Monetary Policy Committee to be almost unanimous in favor of a rate cut.
Figure 2
According to a survey, economists tend to support this rate cut with a majority vote of 8 to 1. Katherine Mann, who is expected to be the only hawk to oppose a rate cut if the vote is split, has warned the Bank of England could start easing policy prematurely. However, more than a third of economists surveyed expected more to join her in voting to keep rates on hold.
While Governor Andrew Bailey has begun to open the door to a faster pace of rate cuts, he is likely to take a more cautious approach after a week of political turmoil. The Monetary Policy Committee is likely to repeat its September guidance to “gradually remove policy restrictions.”
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Sonali Punhani, chief UK economist at Bank of America, predicted: “We expect the central bank’s guidance to remain consistent with September, continuing to emphasize a gradual, meeting-by-meeting approach and keeping policy modestly restrictive. ”
Overall, the Bank of England’s decision will not change its rhetoric of cautious easing, especially after the uncertainty caused by Trump’s election victory. Traders see less than a 25% chance of the Bank of England cutting interest rates in December. Only three rate cuts are fully priced in by the end of 2025, leaving the BoE’s easing cycle behind that of the European Central Bank and the Federal Reserve.
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