Bank of England set for tight rates decision as inflation softens and budget looms

By William Schomberg

LONDON (Reuters) -The Bank of England is set to announce a potentially knife-edge interest rate decision on Thursday with most investors expecting no change before this month's government budget, but some analysts say inflation heat is cooling enough for a cut.

What had until recently seemed likely to be a clear majority vote to keep the BoE's Bank Rate at 4.0% now looks much closer.

Investors are assigning an almost one-in-three chance of a cut to 3.75%, up from a one-in-10 possibility a month ago.

Britain's inflation rate of 3.8% remains the highest among the Group of Seven major advanced economies and the BoE's benchmark interest rate is double that of the European Central Bank.

INFLATION HELD STEADY IN SEPTEMBER

However, inflation unexpectedly held steady in September and recent jobs data was welcomed by BoE Governor Andrew Bailey as a sign that inflation pressures were easing.

Furthermore, finance minister Rachel Reeves is expected to announce broad tax increases in her budget on November 26, possibly weighing on the economy.

U.S. investment bank Goldman Sachs last week changed its view and said it now expected a rate cut when the BoE announces its decision at 1200 GMT on Thursday. Other analysts see a tight vote the other way by the nine-member Monetary Policy Committee.

"We think the BoE will deliver a dovish hold," analysts at investment bank Evercore ISI said in a note to clients, predicting a 5-4 MPC decision to leave Bank Rate unchanged.

After suggesting in August that it might be time to slow its once-every-three-months pace of rate cuts, Bailey and his top officials might think it is too soon to move again, they said.

Most economists polled by Reuters last month predicted a 6-3 decision by the MPC to leave Bank Rate unchanged.

By the time the MPC meets again next month, it will have details on the extent of tax increases in the budget and official inflation and jobs data for October and November.

Julien Lafargue, chief market strategist at Barclays Private Bank, said the lack of clarity on how much the government would raise taxes in its budget represented a missing piece of the puzzle for the central bank.

"Should the MPC decide to stay put, a cut in December would still be on the cards in our opinion," Lafargue said.

Investors are pricing a roughly 60% chance of a reduction in Bank Rate next month.

BOE SEEKING TO CHANGE FORECASTING PROCESS

Thursday's announcement will for the first time include summaries of the views of individual MPC members. It will also assign less importance to the central inflation forecast and provide more space for alternative scenarios.

The BoE is seeking to change its forecasting process and how it explains its thinking after being widely criticised when British inflation topped 11% in October 2022.

In August, the BoE said inflation was only likely to return to its 2% target in the second quarter of 2027. It forecast modest economic growth of 1.25% for this year and next.

Bailey and other MPC members are due to give a press conference at 1230 GMT.

(Writing by William Schomberg; Editing by Alex Richardson)