The possibility for the Bank of England’s Monetary Policy Committee (MPC) to cut the base rate on 7 November seems more likely following the governor’s comments that inflation was falling fast.
Speaking at the Institute of International Finance in Washington DC yesterday, Andrew Bailey, governor of the Bank of England, said: “Disinflation – and the UK is part of this – has actually taken place faster than we expected it to.”
However, he said there were still “genuine question marks about whether there have been some structural changes in the economy”.
Bailey added: “If you’d ask me what inflation was going to be now, it would have been a bit higher than it is today.”
The most recent data showed that inflation in the UK had dropped below the central bank’s 2% target to 1.7%, but yesterday Bailey said services price inflation, which fell from 5.9% to 4.6% from August to September, still had to “come further down”.
He added: “We’ve got a very unbalanced mix of inflation components and services inflation remains higher than is consistent with the target.”
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A base rate cut in November?
Bailey’s comments come just weeks after he suggested the Bank of England could have been more “aggressive” in its rate-cutting strategy, provided inflation was manageable.
His speech in Washington DC this week has added to speculation that the central bank could lower the base rate at its next meeting in November.
Nick Mendes, mortgage technical manager at John Charcol, said: “Andrew Bailey has recently hinted at the possibility of faster and more aggressive interest rate cuts, acknowledging that inflation has fallen further and faster than anticipated.
“At present, the outlook appears positive. We’re likely to see a 0.25% reduction in the Bank of England’s base rate in November, although inflation is projected to tick up slightly from the unexpectedly low 1.7%.”
Mendes added: “It’s important to consider Bailey’s comments in context: while he is signalling potential rate cuts, we should remember that he previously stated a few years ago that inflationary pressures were not expected to be long-lasting or persistent. Earlier this month, Bailey also suggested that the rate-setting committee consider a ‘more aggressive’ approach when it comes to base rate reductions.
“That said, not all voices within the Bank of England are aligned on this issue. The bank’s chief economist, Huw Pill, offered a more cautious perspective the following day, advising that rates should not be reduced ‘too far or too fast’.
“While the prospect of rate cuts is encouraging, it is still too early to confidently predict how many cuts we will see or how deep they might be over the next 12 months. With these differing viewpoints from the Bank of England, the situation looks promising, but it’s one that requires careful monitoring to avoid overly optimistic expectations.”
“Financial markets and mortgage brokers will be eagerly awaiting the notes and voting behaviour from the next Monetary Policy Committee meeting in November. The insights gathered from that meeting will provide a clearer view of the Bank of England’s direction on interest rates and inflation management.
“The results of the meeting could shed more light on how aggressively the bank may move forward on rate cuts and whether the current optimistic outlook will remain stable in the coming months,” Mendes added.
