Bank of England nears end of rate cuts

The Bank of England is unlikely to make significant cuts to interest rates in the coming year, as officials have indicated that the current cycle cannot continue indefinitely. During a hearing before the Treasury Select Committee, members of the Monetary Policy Committee (MPC) suggested that market predictions of no further cuts this year may be accurate.

External member Megan Greene noted that while there is disagreement among Bank officials regarding the possibility of finding a neutral rate, fewer cuts are expected. She stated that the rate-cutting cycle could not persist forever, indicating that the Bank is nearing its final reductions.

Deputy Governor Clare Lombardelli mentioned in a written note that the neutral rate is likely to be closer to the upper end of a range between two per cent and four per cent.

Interest rates face an uncertain path, with both rate-setters expressing concerns about price-setting behaviours amid higher inflation expectations among businesses and consumers. Greene highlighted that risks to inflation expectations are more significant due to elevated food price inflation. These remarks cast doubt on whether hawkish members would support further cuts in future meetings, as both Lombardelli and Greene opposed the consensus during a historic interest rate cut in August.

Governor Andrew Bailey acknowledged the uncertainty surrounding the timing and speed of future interest rate cuts, given persistent inflation concerns in the UK economy. However, he also pointed to further weaknesses in the labour market. Fellow rate-setter Alan Taylor, who initially supported a 50 basis point cut at the August meeting before adjusting his vote to a 25 basis point cut, commented that slowing wage growth could suppress price growth in the coming months.

The Bank of England is also addressing high borrowing costs. Governor Bailey emphasised that the increased government borrowing costs, reflected in bond market volatility, are not unique to the UK. He noted a steepening of yield curves across the developed world, attributing this to global factors. Bailey has not yet decided whether to pause the Bank’s quantitative tightening (QT) programme next month, stating that the central bank is not responsible for the bond market turmoil. The Bank’s policymakers will consider QT’s impact on public finances when deciding whether to sell gilts in the coming weeks. Bailey refuted Labour MP Yuan Yang’s claims, based on an IPPR report, that the Bank’s programme is costing the government billions annually.

Additionally, Governor Bailey defended the independence of the Federal Reserve amid threats from President Donald Trump. He expressed concern about attempts to compromise monetary and financial stability maintained by independent central banks, describing such actions as a dangerous path. Bailey emphasised the role of an independent central bank in providing stability and making autonomous decisions, taking threats to this independence seriously.