Bank of England continues gradual and careful rate cuts

Summary

• The Bank of England (BoE) cut rates by 25 bps to 4.00% at today's announcement, although its accompanying commentary was noticeably hawkish in tone.

• BoE policymakers voted by just a slim 5-4 margin to lower interest rates at today's meeting, with the four dissenters preferring to hold rates steady. The central bank's GDP growth forecasts were little changed, although the BoE offered a less favorable outlook on inflation. The BoE now expects a higher near-term inflation peak of 4.0%, and sees inflation decelerating more gradually over time toward, but not below, the 2% inflation target.

• Against this backdrop, the BoE offered cautious guidance regarding further rate cuts, signaling that a "gradual and careful approach to the further withdrawal of monetary policy restraint remains appropriate. The restrictiveness of monetary policy has fallen as Bank Rate has been reduced."

• Acknowledging that today's announcement was hawkish in tone and cautious regarding policy guidance, for now we do not expect a deviation from BoE's quarterly cadence of policy interest rate cuts. Our base case remains for two more rate cuts during the current easing cycle, with 25 bps rate cuts in November and February bringing the policy rate to a low of 3.50% by early next year. Our view stems from our relatively underwhelming view of the U.K.'s economic prospects. Amid sluggish demand we think that there is potential for favorable inflation surprises in the months ahead which should be enough, we think, to keep the central bank at a quarterly rate cut pace.

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