Next week the Bank of England’s Monetary Policy Committee (MPC) will be meeting for the first time since their September meeting. It was in August that the standard base interest rate was cut for the first time since March 2020. The majority vote by the committee took the sixteen-year high base rate from 5.25% to 5.0%. The September meeting resulted in a vote to stay the rate, but the expectation was for at least one more rate cut by the end of the year, leaving that possibility for November or December since there was not a meeting scheduled for October.

The performance of the higher base rate against inflation would be the indicator as to whether the MPC would vote for another rate cut and it has been stated they would err on the side of caution rather than see inflation rise as a result of a too early reduction. Inflation reached the target rate of 2.0% set by the Bank as reported in both May and June. In July and August inflation reports, which actually reports on the month prior when data is released, inflation sat at 2.2%.

The slightly above target inflation rate was expected for the remainder of the year, with a target of 2.0% to be hit again next year and to fall below target eventually. However, in the latest report on inflation released in September and reporting on the twelve months to August, inflation experienced a surprising sharp decline to 1.7%. This has fueled the optimism for another rate cut to happen next month.

The possibility of another rate cut has also been supported by the Bank’s governor, Andrew Bailey, acknowledging inflation was surprisingly lower than expected. 

In a speaking engagement at the Institute of International Finance in Washington DC this week, he said, “If you’d ask me what inflation was going to be now, it would have been a bit higher than it is today.”

The MPC must have a majority vote to cut the rate and a reason some committee members might vote to hold the rate steady would be due to the services inflation, which declined to 4.6% from 5.9%, but is still considered too high. 

Nick Mendes, mortgage technical manager with John Charcol, remarked, “Andrew Bailey has recently hinted at the possibility of faster and more aggressive interest rate cuts, acknowledging that inflation has fallen further and faster than anticipated.

“At present, the outlook appears positive. We’re likely to see a 0.25% reduction in the Bank of England’s base rate in November, although inflation is projected to tick up slightly from the unexpectedly low 1.7%.”

Mr. Mendes added, “It’s important to consider Bailey’s comments in context: while he is signaling potential rate cuts, we should remember that he previously stated a few years ago that inflationary pressures were not expected to be long-lasting or persistent. Earlier this month, Bailey also suggested that the rate-setting committee consider a ‘more aggressive’ approach when it comes to base rate reductions. 

“That said, not all voices within the Bank of England are aligned on this issue. The bank’s chief economist, Huw Pill, offered a more cautious perspective the following day, advising that rates should not be reduced ‘too far or too fast’.

“While the prospect of rate cuts is encouraging, it is still too early to confidently predict how many cuts we will see or how deep they might be over the next 12 months. With these differing viewpoints from the Bank of England, the situation looks promising, but it’s one that requires careful monitoring to avoid overly optimistic expectations.”

“Financial markets and mortgage brokers will be eagerly awaiting the notes and voting behaviour from the next Monetary Policy Committee meeting in November. The insights gathered from that meeting will provide a clearer view of the Bank of England’s direction on interest rates and inflation management.

“The results of the meeting could shed more light on how aggressively the bank may move forward on rate cuts and whether the current optimistic outlook will remain stable in the coming months.”

As Mr. Mendes made reference to in his statement, if the MPC votes for another rate cut in November it will likely be for a 0.25% reduction which would take the base rate from 5.0% to 4.75%, which would be the lowest rate since June 2023. The next MPC meeting is scheduled for Thursday, 7 November.