Monetary Policy Committee preview: Steady as she goes

After the European Central Bank (ECB) cut interest rates this week and with the Fed almost certain to cut interest rates next week, the Bank of England (BoE) will be the exception in keeping interest rates on hold on Thursday. There isn’t likely to be a significant change in the forward guidance either, with November still the next chance for a rate cut. 

We expect a 7-2 vote in favour of keeping interest rates on hold at Thursday’s meeting. It will also probably maintain the pace of Quantitative Tightening (QT) at £100bn per year. 

Data moving in the right direction, but not by enough to prompt a cut 

All the data since the last Monetary Policy Committee (MPC) meeting at the start of August has moved in the right direction, at least as far as the MPC is concerned. 

Services inflation has dropped, wage growth has slowed and the two consecutive months of flatlining GDP growth has reduced the risk of the economy overheating. What’s more, forward-looking data such as the PMIs suggests that price pressures are continuing to ease, especially in the crucial services sector. Even the MPC’s own forecasts from last month have CPI inflation falling to 1.7% in Q2 2026 and 1.5% in mid-2027.

Unfortunately, the labour market picture is about as clear as mud at the minute. The number of employees counted by payroll numbers dropped by 6,000 in July and by another 60,000 in August, but the Labour Force Survey (LFS) measure of employment grew by 265,000 in July and the unemployment rate dropped to 4.1%, well below the MPC forecast. The LFS data is still ropey, so we think the MPC will put more weight on the wage growth numbers. Employment surveys are also pointing to hiring intentions recovering. On balance, we think there is still plenty of slack in the labour market, especially amongst younger workers. 

All that suggests then that the MPC could justify a rate cut if it wanted to. Indeed, similar data points convinced the ECB to cut rates again this week and will be used by the Fed to justify its cut next week.

However, at its last meeting, the MPC made clear that it was going to take a very cautious and gradual approach to lowering interest rates this year. Recall that even for those members that voted to cut, the decision was "finely balanced". And Bank Governor, Andrew Bailey, said the committee is cautious about cutting “too quickly or by too much”.

Even though the data is moving in the right direction, there is nothing in there that would justify the MPC surprising the market, there is a 15% chance of rate cut priced into markets.

As a result, rates will be kept on hold next week, but the committee will signal that a November rate cut is still on as long as the data continues to move in the right direction.

The MPC is also due to set the speed of QT over the next year. It has signalled that it wants to be predictable with how quickly it reduces the size of its balance sheet, so we expect it to continue QT at £100bn per year. 

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