(Bloomberg) -- The Bank of England looks set to stick to its tentative interest-rate cutting when it meets this week, defying skepticism from a growing cohort of investors who see a need for more aggressive action.
While Governor Andrew Bailey and colleagues are widely predicted to hold off on another cut in borrowing costs on Thursday, money managers at Abrdn Investment Management Ltd., Aviva Investors and Allianz Global Investors are piling on bets that such caution can’t last long in the face of slower economic growth and a tax-raising budget.
Strategists at banks including Goldman Sachs Group Inc., HSBC Bank plc. and UBS Group AG agree, reckoning that officials will soon be forced to ramp up their response against a backdrop of weakening UK momentum after prolonged constriction from the highest rates in a generation.
But with data this week anticipated by economists to show resurgent services inflation, wary policymakers aren’t likely to change tone — even in the aftermath of an initial drop in borrowing costs by the US Federal Reserve expected on Wednesday, following a second reduction by the European Central Bank last week. The Fed and BOE meetings are part of a 36-hour flurry of central bank action, culminating with the Bank of Japan on Friday.
Markets currently anticipate the BOE of to keep rates unchanged at the Sept. 19 decision before at a quarter-point cut in November and another in December. For Bhanu Baweja, chief strategist at UBS in London, it’s just a matter of time before UK officials stop hesitating and respond with more urgency to the dangers facing the economy.
“This is a place where I think tight monetary policy is going to have a much quicker impact than in other places like Europe, and certainly the US,” he said. “If I have to pick one developed market where today I feel that the risk reward is unambiguously to receive rates relative to what’s priced in, it’s the UK.”
The BOE did signal further cuts in August when it delivered its first reduction in more than four years to 5%, but insisted it wouldn’t be rushed, given the lack of any threat of recession or a spike in unemployment.
Instead, the Monetary Policy Committee indicated it will tread carefully and take decisions “meeting by meeting” amid lingering underlying inflation pressures.
What Bloomberg Economics Says...
“The BOE is likely to keep rates on hold at its September meeting, a signal that it is yet to be convinced that inflation has been defeated and that it’s minded to take a cautious approach to easing.”
—Dan Hanson and Ana Andrade. For their BOE PREVIEW, click here
Markets are pricing in another seven quarter-point moves by the start of 2026, foreseeing a terminal rate of 3.25%.
The current consensus view that the UK central bank will move more slowly than the Fed and ECB has already left Britain’s borrowing costs elevated compared to peers.
Nomura’s chief European economist, George Buckley, reckons that the BOE will cut rates only once a quarter, with the next move alongside new projections in November. He and many peers don’t see officials changing guidance this week.
The justification for such caution is an outlook of sticky consumer-price growth.
Data on Wednesday are predicted by economists to show services inflation, which is closely followed by ratesetters jumped to 5.6% in August. The BOE reckons the headline gauge, currently at 2.2%, will surge back to 2.7% by December.
UK wage growth also remains higher than compatible with the 2% inflation target, at 5.1%, and the labor market strengthened in data released last week.
But the view that stubborn consumer-price gains in Britain will ultimately brake monetary easing doesn’t convince Daniela Russell, HSBC’s head of UK rates strategy.
“We would challenge this interpretation,” she wrote in a report. “If the labor market continues to loosen as it has been, the BOE is likely to tolerate a slower return of inflation to target, and so would cut rates more sharply than expected.”
Gross domestic product data last week might support that view. The numbers showed stagnation in July, meaning the UK has seen no growth in three of the past four months for which data are available.
“If the BOE delays policy easing then the economy would decelerate quite notably, something that would suggest faster and deeper rate cuts later,” said Harriet Ballard, multi-asset portfolio manager at Aviva. “We still see risks to the UK economy as household consumption remains sluggish, mortgage cost servicing is likely to rise, and the labor market is cooling.”
Goldman Sachs analysts, including Chief European Economist Sven Jari Stehn, said in a note last week that they expect the BOE to deliver consecutive rate reductions starting in November, as opposed to one every other meeting, ultimately bringing the benchmark to 3%. UBS’s Baweja has the same terminal rate forecast.
More investors are starting to think that way too. Gilts rallied this month, outperforming euro-area peers, as the market priced in a higher chance of the BOE delivering two more rate cuts this year.
The yield on policy sensitive two-year notes fell more than 30 basis points to 3.80%. A quarter-point cut in November is fully priced and the chance of another in December is currently above 90%, from 50% at the start of the month.
UBS says its own bullish call on two-year gilts is one of the top trades of the past few months.
Abrdn last month said it is “heavily” overweight gilts over European and US government bonds, because money markets are off the mark in their outlook for UK monetary policy. Aviva is also bullish and others like Federated Hermes are considering going overweight.
Aside from the souring economic backdrop, investors are also motivated by the prospect that Chancellor Rachel Reeves may raise taxes in the budget on Oct. 30 as she seeks to fill a £22 billion ($28.9 billion) black hole in the public finances. That would imply fiscal tightening.
“We’re about to get what’s effectively an austerity budget at the end of October,” said Orla Garvey, senior fixed income portfolio manager at Federated Hermes. “I don’t think we’re fully pricing the slowdown that I think we’re going to get.”
--With assistance from Anchalee Worrachate, Alice Gledhill and Naomi Tajitsu.
(Updates with Bank of Japan in fourth paragraph. An earlier version corrected the timing of BOE meeting in first paragraph.)
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