The Bank of England (BoE) will closely affect markets with its interest rate decision to be announced on Thursday. While most investors expect the rate to remain at 4.0%, some analysts see the softening of inflation as an opportunity for a rate cut.
While a clear majority was expected to keep rates unchanged in recent weeks, the decision is now considered a “knife-edge”. The probability of a rate cut in the markets has risen to 30%. The UK’s inflation rate of 3.8% is still the highest among G7 countries.
Inflation remained flat in September, and the improvement in employment data was interpreted by BoE Governor Andrew Bailey as “the pressures are easing.” Furthermore, Finance Minister Rachel Reeves is expected to announce broad tax increases in the November 26 budget, which could slow the economy.
Goldman Sachs changed its forecast last week, stating that it now expects an interest rate cut. Other analysts predict that the decision to keep rates unchanged could come out with a 5-4 vote within the 9-member Monetary Policy Committee (MPC). The Bank of England’s (BoE) decision will, for the first time, include summaries of the individual opinions of MPC members. Furthermore, the weighting of inflation forecasts will be reduced, giving more space to alternative scenarios. The Central Bank aims to revise its forecasting processes, which have been criticized since inflation exceeded 11% in 2022. The Bank of England (BoE) expects inflation to reach its 2% target only in the second quarter of 2027 and forecasts limited growth of 1.25% for the next two years.
