The Bank of England’s MPC is set to meet this week for its interest rate decision. According to a Barclays research report, the central bank is expected to cut the interest rate by 25 basis points and maintain the status quo. Even if the labor market data for the month of November released last week was resilient, other data since the last MPC have come in soft. This has been in conjunction with various MPC members striking explicitly dovish tones in the previous weeks.
“Additionally, the risk reward is asymmetric: do not cut and risk a bigger slowdown, or cut and risk a mild overheating. MPC dissenters have been making the point that a cut would help manage risks by steering the economy away from a worse outcome, against which the Bank may lack sufficient firepower”, said Barclays.
The window to lower rates closes shortly after January. Even if the data is likely to rebound in the mid of 2020, there might still be a case for a cut in May should any recovery be not enough, although history implies that the MPC in such a scenario would be cautious of making a rate decision against the direction of data.
The BoE had argued that in spite of expectations of a return to economic growth, temporary soft conditions justified a pause in the hiking cycle.
“We do not expect the decision to be unanimous and for two members to dissent, likely citing resilient labour market data, lower trend growth, improved confidence surveys and/or fiscal easing. After this month’s forecast cut, we expect interest rates remaining unchanged over the forecast horizon as we see trend growth edging lower as the UK transitions out of the EU. Lower trend growth would limit the build-up in spare capacity and keep inflation close enough to 2 percent despite a 1 percent growth outlook”, added Barclays.
