Bank of England set to split again in face of inflation, job risks

By William Schomberg

LONDON (Reuters) -The Bank of England is expected to cut interest rates next week but the likelihood of a fresh three-way split among policymakers underscores the conflicting risks posed by rising inflation and a weakening job market to Britain's economy.

The BoE's Monetary Policy Committee still appears divided between those who want aggressive action to offset the slowing job market, others who worry about persistent inflation pressure and a majority in the middle who favour gradual rate cuts.

The MPC's vote broke three ways in May when the BoE cut its benchmark rate by 25 basis points. Many analysts expect a similar outcome on August 7 with the majority backing another quarter-point cut in Bank Rate while others call for a bigger half-point move and some favour no cut at all.

Governor Andrew Bailey and most of his colleagues have stuck to their "gradual and careful" messaging about how quickly they are likely to ease the burden of high interest rates on Britain's economy.

But some analysts think the BoE might be approaching the end of its run of reducing borrowing costs.

Robert Wood and Elliott Jordan-Doak, economists at Pantheon Macroeconomics, predict a "one-and-done" cut next week and expect inflation to hold above the BoE's target of 2% through 2026 and 2027 - in contrast to the BoE's view that CPI will return to 2% early in 2027.

"We think the Monetary Policy Committee will have to press pause after one more cut," they said. "Six years of near-continuous inflation overshoots cannot be ignored."

By contrast, most economists polled by Reuters earlier this month expected the BoE to cut rates in November as well as next week, followed by two more quarter-point cuts in 2026.

That would take Bank Rate down to 3.25% from its peak of 5.25% following a surge in inflation above 11% in 2022. But it would still be a lot higher than its level of 0.5% that held for much of the decade after the 2007-08 global financial crisis.

RATE CUTS RUNNING OUT OF ROAD?

Finance minister Rachel Reeves has often pointed to the four rate cuts since last August as a sign of recovery in the British economy since her Labour Party took power just over a year ago.

However, some economists see the BoE's gradualist approach to cutting rates turning even more cautious after a run of data that suggests Britain's high inflation rate is stickier than previously thought.

Headline consumer price inflation unexpectedly rose to 3.6% in June and surveys of inflation expectations have shown the public is largely expecting stronger price growth.

Elizabeth Martins and Chris Hare, economists at HSBC, said the BoE might increase its forecast for inflation's peak this year to as high as 4% - double its 2% target - from a previous estimate of 3.7%.

Policymakers could also sound more concerned about a potential knock-on impact from higher inflation on the public's expectations for inflation and pay growth over the medium term.

"The June minutes noted that rising food inflation increases the risk," Martins and Hare said.

But they added that the signs of weakness in the labour market meant the BoE was likely to keep its forecast for inflation in two years' time just below target at 1.9%.

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.

(Writing by William Schomberg; editing by Mark Heinrich)