Bank of England likely to slow rate-cut cycle this week

By David Milliken

LONDON (Reuters) -The Bank of England looks likely to keep interest rates on hold on Thursday, slowing its pace of cuts for the first time since it started to loosen policy last year, although some analysts do now expect a reduction after softer inflation and wage data.

The BoE's most recent rate cut - by a quarter-point to 4% in August - only passed by a 5-4 margin after two rounds of voting by the Monetary Policy Committee. 

In September, Governor Andrew Bailey said the pace of rate cuts, which the BoE has delivered once every three months since August 2024, was "more uncertain".

British consumer price inflation remains the highest among major advanced economies at 3.8% due largely to one-off factors including April's rise in employer social security charges.

However, the fact that inflation did not rise to 4% in September as the BoE had been forecasting, alongside a further softening in wage growth and a rise in unemployment, has revived bets on a cut on Thursday.

MARKETS SEE 1-IN-3 CHANCE OF THURSDAY CUT

Financial markets on Friday priced in a 1-in-3 chance of a quarter-point cut on November 6, rising to two-in-three by the end of the year. Last week, U.S. investment bank Goldman Sachs changed its view to predict a November rate cut. 

But overall, a narrow majority of economists polled by Reuters last week did not expect the BoE to move before 2026.

The European Central Bank - which has inflation almost on target - held rates last week and appears to be at the end of its cutting cycle. A divided U.S. Federal Reserve, under pressure from President Donald Trump, cut rates by a quarter-point to a range of 3.75-4%.

James Smith, an economist at Dutch bank ING, predicted another 5-4 split among the BoE's policymakers - but this time in favour of keeping rates on hold, and he viewed a December cut as being in the balance, depending partly on finance minister Rachel Reeves' November 26 budget.

Softer data since September's meeting was unlikely to have resolved divisions on the MPC, he said.

"Having turned more cautious over the summer, I don't think their thinking will have shifted as much as the market pricing has over the last month," he said.

MPC DIVIDED OVER INFLATION PRESSURES

Some BoE policymakers, such as Chief Economist Huw Pill and external MPC member Catherine Mann, fear inflation's rebound to close to 4%, less than three years after it was in double digits, might weaken businesses' and households' confidence that the BoE can reliably achieve its 2% inflation target.

Others focus more on falling employment and a slowdown in wages as a sign that workers cannot push for higher wages.

Bailey said last month the latest wage data was in line with his view that labour market pressures were easing. 

"It will not be a straightforward decision for the MPC," said Nomura economist George Buckley who expects a 5-4 vote to cut rates this week. 

Bailey and Deputy Governors Sarah Breeden and Dave Ramsden would join external MPC members Swati Dhingra and Alan Taylor who have repeatedly voted for lower rates, Buckley predicted.

MORE BERNANKE RECOMMENDATIONS TO BE IMPLEMENTED

The BoE will this week take another step in overhauling how it explains its decision-making, following recommendations last year by former U.S. Federal Reserve chair Ben Bernanke.

For the first time, individual MPC members will state their personal policy views and more space will be given to assessing the impact of economic scenarios that differ from the central view and different paths for interest rates.

The MPC will also spend less time fine-tuning its inflation forecasts, which have previously been used to help steer market expectations.

In August, the BoE predicted inflation would not return to its 2% target until the second quarter of 2027, and pencilled in modest annual economic growth of 1.25% for this year and next.

(Reporting by David Milliken; Editing by Hugh Lawson)