Bank of England, facing jobs-inflation dilemma, poised to cut rates

By William Schomberg

LONDON (Reuters) -The Bank of England looks poised to cut interest rates for the fifth time in 12 months on Thursday but nagging worries about inflation are likely to split its policymakers and cloud the outlook for its next moves.

Governor Andrew Bailey and most of the Monetary Policy Committee are expected to favour taking Bank Rate to 4% from 4.25% as they react to a jobs slowdown made worse by a tax hike on employers and U.S. President Donald Trump's trade war.

But two MPC members might push for a bigger cut to prop up the economy while another two might prefer no cut at all due to their inflation concerns, a voting pattern last seen in May and reflecting the conflicting pressures on Britain's central bank.

Investors will be watching to see if the BoE sticks to its "gradual and careful" language about the pace of lowering borrowing costs, a message that economists have taken to mean one rate cut every three months.

That slow and steady path no longer looks so clear, with inflation running above the BoE's projections and forecast by some economists to reach 4% in coming months, double the central bank's target.

Economists at Pantheon Macroeconomics have predicted Thursday's rate cut will be the BoE's last for a while due to the persistence of inflation.

That would be a blow for finance minister Rachel Reeves and Prime Minister Keir Starmer, who have promised to speed up Britain's slow economic growth.

By contrast, analysts at investment bank Evercore think the BoE might accelerate the pace of cuts later this year as hiring weakens further.

Investors are mostly pricing in another cut in November after Thursday's expected move but only one or two more reductions in 2026, which would leave Bank Rate at 3.5% or 3.25%, higher than the euro zone's benchmark rate of 2%.

HIGH INFLATION EXPECTATIONS

High inflation expectations in surveys of the British public mean Bailey and the rest of the MPC cannot focus squarely on giving the economy a boost by cutting borrowing costs.

Inflation has been above the Bank of England's 2% target almost constantly since May 2021.

"If I'm a worker and I'm bargaining for a wage, am I really going to believe that inflation is going to come back to 2%?" Stephen Millard, deputy director at the National Institute of Economic and Social Research think tank, said.

"I would, personally. But I could imagine there's still quite a bit of wage pressure just coming from that."

In contrast to the BoE, which has forecast that inflation will only return to 2% in early 2027, the European Central Bank expects inflation in the euro zone to hold below 2%. It has cut borrowing costs eight times since June of last year.

Growth in wages in Britain has proven slower to ease after surging during the COVID-19 pandemic. At about 5% in the most recent data it remains above the 3% level that the BoE thinks is roughly consistent with its inflation target.

The BoE will announce the MPC's latest decision and forecasts for the economy at 1100 GMT, half an hour before Bailey and other top officials hold a press conference.

The central bank is also expected to assess the impact of its programme of running down its stockpile of government debt ahead of a decision in September on the pace of sales over the following 12 months, a key decision for bond investors.

(Editing by Catherine Evans)