BoE to cut rates to 3.75% with vote expected to be 'another close one'

This week is shaping up to be a critical one for the pound. The Bank of England meeting on Thursday will be preceded by the October labour market report on Tuesday, the December flash PMIs of business activity (also on Tuesday) and the November inflation report on Wednesday.

Expectations are for the same stagflationary combination that is making monetary policy unusually difficult, namely a labour market that continues to shed jobs and stubbornly high inflation significantly above the central bank's target.

We still expect another reduction to the base rate to 3.75% on Thursday, but it isn't clear when or even whether the Bank of England can continue its rate cutting cycle unless inflation starts trending decisively down.

The vote on rates this week is likely to be another close one, highlighting the growing disparity of views among committee members. We also expect Bailey and co. to reiterate that any future cuts will be “gradual and careful” and certainly not set in stone.