This will be a mini-version of The Week Ahead, seeing as almost nothing is scheduled for this week.
Therefore, instead of looking ahead, I’m going to review the Bank of England’s interest rate decision on Thursday.
Bank of England decision
On Thursday, as expected, the Bank of England cut rates from 4% to 3.75%.
It was another tight decision with a 5-4 split on the Monetary Policy Committee.
Decisions have been very close in recent times, and the minutes now include the views of each individual member of the committee.
So how can a rate cut be justified when inflation remains above the 2% target? This is how:
CPI inflation has fallen since the previous meeting, to 3.2%. Although above the 2% target, it is now expected to fall back towards target more quickly in the near term. Reflecting restrictive monetary policy, and consistent with evidence of subdued economic growth and building slack in the labour market, pay growth and services price inflation have continued to ease.
In other words: the Bank is basing its decision on medium-term inflation forecasts, not the current inflation rate.
Indeed, the Bank is confident enough in these predictions that it is willing to guide for a continued “gradual downward path” in rates.
Some key data points mentioned in the release:
CPI inflation has reduced from 3.8% (September) to 3.2% (November).
It’s expected to fall further to 3% in Q1 2026.
The recent Budget is considered likely to lower CPI inflation from April by 0.5%.
Combining the effects of the Budget, recent CPI data and oil and gas prices, BoE staff now expect CPI inflation to fall closer to 2% by Q2 2026.
With CPI therefore on the way to target, the Bank is able to continue with its transition into a “less restrictive” monetary policy.
Let’s see what the dissenters had to say, with a few snippets:
Megan Greene:
As Bank Rate approaches neutral, the contribution of monetary policy versus structural factors to disinflation could become harder to discern. This warrants a more cautious cadence of easing.
Clare Lombardelli:
The Budget should mechanically reduce annual inflation in salient categories, reducing the risk of second-round effects, but in absolute terms underlying inflation is still well above target-consistent rates.
Catherine L…
