We expect another 5-4 split vote at Thursday’s MPC meeting, but this time the majority will probably favour cutting interest rates by 25bps to 3.75%. However, this is likely to be a relatively hawkish cut with the guidance remaining cautious. Given the Autumn Budget slightly boosts demand next year, we think there’s only likely to be one further cut in the first half of 2026.

Recent data enough to persuade Andrew Bailey

Most MPC members will stick to their respective hawkish and dovish camps. However, we think the recent data has been weak enough to tip Governor Bailey into voting for a rate cut.

Indeed, headline inflation dropped to 3.6% in October, in line with the Bank’s projections. But, services and food inflation came in slightly under the latest forecasts. That’s important because services inflation is a proxy for domestic price pressures and food price inflation plays an outsized role in setting households’ inflation expectations. Pay growth has also fallen in line with the MPC forecast, but the unemployment rate has risen a little faster.

Finally, the 0.1% m/m drop in GDP in October means it’ll be almost impossible for Q4’s GDP to match the MPC's 0.3% q/q forecast for Q4. There is now a material chance that the economy contracts in Q4.

On balance, the recent data suggests the economy is weaker than the MPC had expected and that the risks to the inflation outlook have shifted to the downside.

What’s more, the MPC will have to take into account the impact on inflation of the changes announced in the Autumn Budget. The freezing of rail fares, temporary freezing of fuel duty and cuts to household energy bills will knock almost 0.5ppts off inflation next year. That will give the MPC more confidence it can cut next week. However, we suspect the MPC will want to look through those one-off reductions in headline inflation and will wait to see if they have a downward impact on inflation expectations. In any case, those policy changes will raise inflation a little in 2027 and 2028, which matters more to the rate-setting timeframe.

As a result, we think a rate cut next week is the most likely outcome. Admittedly, it’s probably a little less likely than the 90% financial markets are pricing in. After all, the vote will still be close.

Most of the recent weakness probably has more to do with pre-Budget nerves than a slowing in underlying growth. The heavily back-loaded tax measures in the Budget also mean the hit to demand from higher taxes, if it materialises, won’t happen until 2029, which is outside the Bank’s forecasting window. Both factors will give enough ammunition to the hawks on the committee to continue to vote to hold rates.

However, we think the latest data has been weak enough to convince the four MPC members who voted to cut rates last time to vote to cut again − and to tip Governor Bailey to switch from voting to hold rates at the last meeting to cutting them next Thursday.

One more rate cut to go

Looking ahead, the scope for further rate cuts looks slim. Our base case is that the MPC will reduce rates once more after December to a terminal rate of 3.5%, which is about where we think the neutral rate lies. Indeed, Governor Bailey also pegged the neutral interest rate at 3.5% in the minutes of the November MPC meeting. Therefore, as rates get below 4%, the MPC will have to be even more cautious and gradual about reducing them further. It will, presumably, also have to change the guidance away from rates being on a “downward path”.

We think it’ll take a material underperformance in the economy to convince the Bank to cut rates much below 3.5%. But, given the economy is likely to contract in Q4 and growth next year relies in a large part on consumers pairing back their high saving rates, there are plenty of scenarios that could see another cut or two. But, if the economy evolves roughly in line with our forecast for growth of around 1.2% next year, then we think the Bank will stop at 3.5%.

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