Bank of England rate decision preview: What to…

The FactSet consensus now has interest rate expectations at 5%, implying no change. Other evidence points to the same conclusion.

“The chances of a further rate cut in September are slim, according to a recent Reuters poll of economists, with almost all respondents believing September will come too soon after the recent rate cut,” said Michael Field, Europe market strategist at Morningstar .

“Markets appear to be pricing in another rate cut, which is likely to come later in the year.”

UK interest rates currently stand at 5% after the BoE’s only cut since 2024 on 1 August. House prices are at a two-month high, but elsewhere negativity has started to creep into election data.

Inflation rose slightly to 2.2% in the 12 months to July and, after a summer of public events and decent weather, there may not be a resumption of the downward trend that politicians negotiated at general elections in July.

The government’s first budget on October 30 is likely to include a raft of tax hikes, and the prime minister is bracing the country – and his own MPs – for economic pain. Of course, the Bank of England remains politically neutral, but it also manages expectations.

“Monetary policy will need to remain accommodative long enough until the risks to a sustainable return of inflation to the 2% target over the medium term dissipate further,” the BoE said in the statement accompanying the August 1 interest rate cut.

“(The MPC) continues to closely monitor the risk of persistent inflation and will decide the appropriate degree of monetary policy tightening at each meeting.”

For observers, this “we reserve the right” style statement has become all too familiar. While markets expect a gradual easing of monetary policy over the coming years, there is no set timetable, as the Bank is keen to point out.

“We must be careful not to cut interest rates too much or too quickly,” the Aug. 1 statement said. The bank expects interest rates to be around 3.5% in the second half of 2027 – three years from now.

Why might the Bank of England stop cutting rates?

The BoE’s August 1 rate cut was the first since the panic days of the 2020 pandemic: a milestone, but not one to celebrate. Some have already seen the caution coming.

“While the immediate decision to cut rates was slightly favorable to market expectations, the overall guidance and statement were more neutral, with the MPC showing no urgency to cut rates from here,” said Pimco economist Peder Beck-Friis , in a note. at the time.

“Looking forward, we expect the Bank to proceed with caution from here. We think another cut in September is unlikely, unless inflation and the labor market surprise on the downside, and we expect the next cut in November as a benchmark.”

The next UK Consumer Price Index from the Office for National Statistics is due on 18 September. This will be a central point of discussion when the BoE MPC meets later that day.

Last month’s figures, which covered the 12 months to July 2024, showed the inflation rate rising to 2.2%, just above the BoE’s target of 2%. The main drivers of the slightly higher price increases were housing and housing services.

There are two other readings worth noting. On September 10 we will get UK unemployment, job vacancies and wage growth data, and on Wednesday we will see UK gross domestic product growth figures for July, alongside UK manufacturing, industrial and construction output.

Dynamics of inflation and economic growth

This data will paint its own picture, but it is not likely to show an overheating economy.

“The reasons why the Bank may decide to keep its interest rate at 5% may be driven by inflation and growth dynamics,” says Morningstar Wealth associate portfolio manager Nicolò Bragazza.

“The Bank of England may decide not to cut interest rates for two main reasons: inflation is higher than expected or growth is stronger than expected.”

There is, however, a counterargument: that the Bank is already too cautious and that its priorities should – despite its neutrality – be more aligned with concerns about economic growth.

“The Bank of England is taking a cautious approach,” Field continues.

“At 5%, the UK has the highest interest rate of any major Western economy, giving it room to cut rates further.

“Of course, the Bank wants time to monitor the effects of the interest rate cut last month. But with inflation above the Bank’s target level, the focus should really be on reviving Britain’s ailing economy rather than worrying about the unlikely event of overheating.”

And Britain is not the center of the universe. In the U.S., disappointing job vacancies numbers sparked a sell-off during trading on Wednesday that hit megacap stocks including Nvidia (NVDA) hard. Fears of an economic recession in the United States have led some to question whether the Fed has been nimble enough in cutting interest rates.

“The worse-than-expected jobs data will almost guarantee a change in the Federal Reserve’s stance,” comments Richard Carter, head of fixed-rate research at Quilter Cheviot.

“The Fed’s decision-making is very data-sensitive, and with many data points continually suggesting a slowdown in the economy, it seems inevitable that we will see the first rate cut confirmed this month.” Field agrees.

“There are lessons to be learned from the stock market performance earlier this month, with the Federal Reserve being criticized for taking too long to cut rates,” he says.

“Being cautious is one thing, being too cautious is another.”

How will the stock and bond markets respond to the Bank of England decision?

But that, of course, is the theory. The practice remains to be seen. We looked in detail at what it could mean for UK bond markets in After the rate cut, should I still be buying bonds for income?

Bragazza says the effect of the BoE’s decision on asset classes will largely be the outcome mode is communicated, as it is the actual substance of the decision itself.

“Asset classes could have different reactions depending on why the BoE doesn’t cut rates,” he says.

“A more positive growth outlook could be welcomed by smaller-cap stocks and stocks in more cyclical sectors with more depressed valuations, particularly in the UK, even after allowing for higher funding costs at which smaller companies are more sensitive.

“On the other hand, higher perceived risk on the inflation front is generally bad news for both stocks and bonds. The persuasive argument can create uncertainty about the future path of monetary policy, and this can have negative consequences for asset prices, especially for smaller companies and companies with higher valuations, which are generally more sensitive to changes in market sentiment.

“The impact on European assets of a BoE decision is difficult to assess, but depends on how common the reasons behind keeping interest rates at the same level are common to European economies.”