MPC Meeting: MPC still in no hurry to cut

Even considering today’s interest rate cut, the Monetary Policy Committee (MPC) is clearly still in no rush to reduce rates. Despite the 25 basis points (bps) cut, down to 4.5%, and the vote split being slightly dovish, the higher inflation forecasts and the relatively unchanged guidance suggest the committee is still prioritising caution. However, we still expect cuts to come once a quarter over 2025, meaning rates would end the year at 3.75%.

Dovish or not?

The MPC has been criticised in the past for sending mixed messages, but this time it was especially confusing.

The vote split was clearly more dovish than expected with two members voting for a 50 bps cut. What was especially surprising was Catherine Mann’s switch from arch hawk to ultra dove, the monetary policy equivalent of Haaland switching from Man. City to Man. U. At face value this might make it easier to reach a majority for future rate cuts. Financial markets have certainly taken it that way with markets going from pricing in two more rate cuts to three. The sharp downgrade in the forecast for growth this year (1.5% to 0.75%) also suggest that the committee has become more concerned about the economy. 

However, things are not nearly as dovish as the votes may suggest. Most members of the committee were happy to go with the standard 25 bps cut and are now putting more weight on scenarios two and three. Recall, the MPC had previously set out three scenarios as to how the economy might evolve, scenarios two and three were the ones which implied fewer rather than more rate cuts.

Even Catherine Mann seemed to hedge her 50 bps vote. Indeed, the minutes suggest Mann said “a more activist approach at this meeting would give a clearer signal of financial conditions appropriate for the United Kingdom, even as monetary policy would need to remain restrictive for some time to anchor inflation expectations, and Bank Rate would likely stay high given structural persistence and macroeconomic volatility.” 

Essentially saying she would like to front load rate cuts while the focus is on weaker growth rather than higher inflation.

What’s more, the dramatic shift up in the inflation forecast leaves inflation peaking at 3.7%, almost a full percentage point above its November forecast. More importantly, inflation in Q1 2027, which is the policy horizon, was also raised to 2.3% and inflation will only fall to just below the 2% inflation target by 2028.

The increase will primarily be driven by the Bank’s forecasts for energy prices, specifically gas, to rise over the coming period. They anticipate NICs will hit prices more in the short-term before firms adjust headcount and slow wage growth over a longer period. 

Finally, the forward guidance remained little changed with the minutes stating that rate cuts will be “gradual” and that rates need to be “restrictive for sufficiently long”.

Overall, the combination of dovish votes but hawkish forecasts means we’re not much clearer on how interest rates will evolve now than we were this morning. The recent weakness in growth clearly hasn’t been enough to significantly shift the dial on the outlook, given the simultaneous increase in inflation. 

Our base case remains that a quarterly pace of cuts is the most likely path over the coming year. But the risks both to the upside and the downside are clearly rising. 

Economic uncertainty reigns supreme 

One thing that stood out clearly from the report is that the current uncertainty around everything from how firms are responding to the Autumn Budget to how tariffs will impact inflation is making the MPC’s job that much harder at the minute. 

In addition to the risks around inflation persistence, there are also uncertainties around the trajectories of both demand and supply in the economy that could have implications for monetary policy. Should there be greater or longer-lasting weakness in demand relative to supply, this could push down on inflationary pressures, warranting a less restrictive path of Bank Rate. If there were to be more constrained supply relative to demand, this could sustain domestic price and wage pressures, consistent with a relatively tighter monetary policy path.

Translating this from Bank language, the MPC is saying that the risks are double sided. If the sick rate continues to rise then this would have a negative impact on the supply capacity of the economy, for example, which would be inflationary. But if consumer saving rates remain high, then demand could fall short, which would be disinflationary. 

Until there is a bit more certainty around how US trade policy, domestic inflation pressures and consumer behaviour are evolving the MPC is likely to continue its “careful and cautious” approach. 

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