BOE Expected to Cut Rates Despite Budget Turmoil

The BOE is expected to proceed with a quarter-point cut despite the Budget turmoil, but traders are now keen to know what will happen next.

Has Inflation Improved Enough

Economists unanimously expect the BOE to cut interest rates by 25 basis points when it convenes on Thursday. The markets have also generally factored in this sentiment. Markets have been unsettled following the Chancellor's autumn Budget, which was more tax and spend-heavy than anticipated. The so-called bond vigilantes are active, pushing up yields on the benchmark 10-year gilt, which has caused the pound to appreciate against the dollar. Markets are concerned that an increase in taxes will be passed on to consumers, along with higher spending and increasing demand, both of which would leave inflation higher in the medium to long term. While this may mean the BOE won't be as aggressive in cutting rates throughout the coming year, it has left expectations for the upcoming meeting largely unchanged.

Inflation has recently dropped below the target. However, BOE Governor Andrew Bailey has previously cautioned that services inflation remained elevated, so a rapid downward trajectory for rates should not be expected. He admitted that services inflation has normalised at a faster rate than the Bank had anticipated. Headline inflation fell to 1.7% in September, below the BOE's 2.0% target, though core inflation remained high, along with average earnings growing at an annual rate of 4.0% at the last measure. Strong wage growth from a tight labour market is also seen as contributing to higher inflation, with the headline rate expected to rise above the target in the coming months before settling back down.​

The Vote That Counts

With the BOE poised to reduce interest rates for the second time in this cycle, investors might closely examine the voting split to comprehend the likelihood of future rate cuts better. During the previous rate cut, the vote was a narrow 5-4 in favour, with markets likely anticipating a wider margin this time to justify expectations of further easing. The bank has one more meeting scheduled this year. Some analysts suggest that the BOE could adopt a quarterly rate-cutting pattern to gradually lower rates as core inflation slowly normalises. If the BOE does not indicate that additional cuts will follow at the December meeting, this slow rate easing progression could gain traction.

This implies that the market is now pricing fewer rate cuts for the BOE than its main counterparts, the Fed and the ECB. The turmoil from the budget could prompt the BOE to reinforce the gradualist approach to avoid unsettling investors further. Meanwhile, volatility in the GBPUSD rate stems from the other side of the Atlantic, as former President Donald Trump assumes the unofficial title of President (re)elect, with dollar yields rising in anticipation of fewer rate cuts in the coming months. The stronger dollar has reversed the pound's early gains against the dollar.

GBPUSD in Impulse Structure

GBPUSD seems to have commenced a downward trend from the peak of 1.3434, displaying a 5-wave impulse pattern to 1.2843. Although a potential corrective leg above 1.3050 and towards 1.3070 and perhaps 1.3185 cannot be ruled out, the pair remains vulnerable to further declines. Support below the short-term swing low and the 1.27 threshold sits at 1.2661.​

Source: SpreadEx / GBPUSD

Key Takeaways

The BOE is expected to proceed with a 25 basis point interest rate cut despite the recent Budget turmoil, although traders are keen to understand the central bank's future policy trajectory. While inflation has moderated below the 2% target, services inflation and solid wage growth remain elevated, potentially necessitating a gradual approach to rate reductions. The voting split at this meeting could provide insights into the likelihood of further easing measures. Meanwhile, volatility in the GBPUSD rate is influenced by factors such as the US political landscape and shifting market expectations for rate cuts by major central banks.​