The Bank of England’s trouble-free decision to cut interest rates
The Bank of England has long suffered from the accusation of groupthink. Reforms have been mooted – and some have been implemented – but it has struggled to shake off the charge. Economists at the Cato Institute and the National Institute of Economic and Social Research (NIESR) have, for example, pointed the blame at Threadneedle Street’s idiosyncrasies for the surge in inflation after Russia’s full-scale invasion of Ukraine.
But as the City awaits the Bank’s next monetary policy decision on Thursday, it’s clear that when it comes to monetary policy a lively debate exists. While the doves will stay dovish and the hawks will hawk on, it is quite clear – “almost certain” – that interest rates will be cut by 25 basis points, bringing the Bank Rate down to four per cent.
It is not because of a lack of strife and wrangling over conflicting data points that Bank officials can cast their votes in peace, but it is precisely because of the messiness of the Monetary Policy Committee as a whole – with its expected sparring on the path of interest rates – that the Bank’s decision will seem justified.
Nothing about the Bank’s decision to cut interest rates will be self-assured, however.
Bank of England’s battle with UK economy
Inflation edged up to 3.6 per cent in the year to June, overshooting economists’ expectations. Price growth could still climb as high as 3.8 per cent in September. Services inflation is still hovering at around 4.7 per cent. It might therefore seem peculiar in other circumstances for the Bank to opt to cut interest rates.
But job numbers are crumbling. Unemployment has crept up by 0.3 percentage points in a matter of months, jobs platforms are pointing to a crisis in new postings, and respondents to key surveys conducted by S&P Global are suggesting that redundancies are yet to slow down. Demand is expected to fall dramatically, according to most forecasters.
Bank of England agents reporting back to the MPC on price expectations among firms have shown a mixed picture: results for the second quarter of the year, which were published in mid-June, showed expected price growth for the year ahead easing slightly from previous surveys but remaining at 3.7 per cent.
The traumas of a cost of living crisis, muddled information on what tariffs mean for businesses and quick developments in Ukraine and the Middle East have left British brains frazzled. The constant threat of tax rises has also been nasty to decision-makers in small businesses, large corporations and policymakers at the Bank.
Rate-setters will often speak about the conflicting data points that keep them awake at night. For a period after the March decision, the effects of tariffs on prices were the only talk in town. After May, economists talked about elevated wage growth. Now Bank members appear to be more worried about troubles in the labour market.
That suggests groupthink is still a bug the Bank cannot cure itself of. But the current MPC cannot exactly be accused of being a flock of sheep managed by the ever-looming figure of Andrew Bailey, who himself seems ready to contradict the government and the markets.
This Thursday’s meeting is widely expected to be the second time the MPC sees a three-way split in three meetings.
| Hawks vs Doves | Description |
Huw Pill | Pill has declared war on the doves, calling for the Bank to stop making quarterly cuts and slow down its rate-cutting cycle. He is most likely to vote for interest rates to be held after inflation ticked up in the year to June. |
Megan Greene | Greene has previously voted for interest rates to be held when others voted for a cut. She has previously advocated for a “wait-and-see” approach, which suggests Greene could want to see further evidence of jobs declining before she votes for a cut. |
Clare Lombardelli | Lombardelli referred to her previous vote for a cut as an “insurance” against the disinflationary effects of President Trump’s aggressive tariffs. But those tariffs may not be as bad as they had once seemed. She may think twice about whether the UK jobs market is as bad as some forecasters say it is, and whether an “insurance” cut is necessary. But perhaps voting for interest rates to be held would not make sense according to the Bank’s central forecast on monetary policy and wider concerns about weaker demand levels. |
Catherine Mann | Mann’s highly unpredictable “activist” strategy could see her vote for a 50 basis point cut on the evidence the labour market was deteriorating or vote for a hold on the basis that wage growth remained elevated. |
Sarah Breeden | Breeden has indicated that she agrees with markets that monetary policy will loosen. It seems sensible to believe she will vote with consensus, but you never know. |
Andrew Bailey | Bailey has been vocal about his concerns about the labour market. His recent comments suggest he is taking a more dovish view on the UK economy and interest rates. |
Dave Ramsden | Ramsden voted against consensus for a 25 basis point cut at the last meeting when the Bank of England held interest rates at 4.25 per cent. Bank watchers will be keen to find out whether he goes a step further and calls for a 50 basis point cut. |
Alan Taylor | Taylor, who admitted he was “activist” during an interview in May, is likely to push for interest rates to fall lower. Weak jobs data provides him with a cause to vote for bigger cuts. |
Swati Dhingra | There is almost no evidence to suggest Dhingra will vote with consensus for a 25 basis point cut. |
Dovish members Swati Dhingra and Alan Taylor are seen as being the most likely to opt for a 50 basis point cut among forecasters, according to ING and Oxford Economics.
Dhingra, an Indian economist who brings expertise in global trade, has even joked she would vote for a full percentage point cut. Chancellor Rachel Reeves, who has repeatedly praised interest rate cuts as if it was Labour’s own policy, backed Dhingra by renewing her term on the Bank’s MPC earlier this year.
Taylor, meanwhile, told former Labour politician Ed Balls in an interview in May he believed interest rates were a “long way” from settling at a neutral level.
On the other end of the spectrum is the Bank’s chief economist Huw Pill, who appeared to speak in a regretful tone in May when he suggested interest rates were cut too early as inflation began to ease after a peak of 11.1 per cent in October 2022.
Quarterly cuts had been “too rapid”, he said. As one of the key figures in the Bank’s MPC, Pill even called for a change in the policy mantra from “careful and gradual” to “cautious and gradual” due to changed price and wage-setting behaviours. Jonathan Haskel, the former MPC external member who was the only economist on CityAM’s Shadow MPC to have voted for interest rates to be held, pointed out that inflationary pressures remained too high despite data points showing wage growth had come down slightly.
Pill is widely predicted to vote for interest rates to be held at four per cent, according to Deutsche Bank’s Sanjay Raja, while Catherine Mann could follow suit.
But Mann is unpredictable. The American economist voted for a 50 basis point cut in February when others voted for a 25 basis point cut and yet voted for a hold in May when her colleagues voted for a cut. Like Taylor, she has described herself as an “activist” member of the MPC.
Future interest rate cuts hang in the balance
Each member will doubtless have their own deliberations when they are called to make their vote. Some will have stayed up all night yesterday and may struggle to sleep well tonight.
But another three-way split will prove the Bank’s rate-setters are engaged in valuable debates about monetary policy, and will not blindly vote for an interest rate cut because the markets say so.
Debates will liven up in the coming months as the rate-cutting cycle approaches its end. Mann delivered an hour-long speech on the neutral interest rate, the level at which an economy is in balance and inflation is stable, only for Bailey to dodge questions about it at a recent Treasury Committee hearing. Taylor, on the other hand, criticised Bailey’s “counterproductive” dismissals as he has called on the MPC to address the questions head-on.
As economists across the English Channel are speculating on whether the European Central Bank will leave its deposit facility rate at two per cent for the foreseeable future, City analysts are already sparring on how many interest rate cuts are to come.
Pantheon Macroeconomics believe August’s cut will be a “one-and-done” job, markets believe rates will fall to 3.5 per cent by the end of 2026 and PIMCO and Morgan Stanley economists believe six cuts are set to come in the next year. It seems likely that these kinds of disagreements will break out at future MPC meetings.
After the last three-way split, Shadow MPC member Julian Jessop, who was previously deputy chief global economist at Capital Economics, said the “lack of groupthink” was “something to cheer”.
“It would be more worrying if nine rate-setters all came to exactly the same conclusion despite the many unknowns, including the fallout from a global trade war,” he said.
The Bank is legally mandated to hit a two per cent inflation target. Should it fail miserably to get inflation back down, it will be hard for critics to blame errors of judgement on groupthink. The MPC can claim to have learnt some lessons from the last period of instability just three years ago.