Bank to make ‘knife-edge’ rates decision amid cut speculation

Bank of England policymakers will gather for a “knife-edge” decision on interest rates this Thursday following recent speculation a cut may be on the way.

Recent gloomy economic data has spurred on a raft of Bank rate-setters to signal growing support for a cut, with financial markets pricing in a 60% chance of a reduction.

Two of the nine-strong Monetary Policy Committee (MPC) have voted to lower rates from 0.75% to 0.5% in the last two meetings and disappointing growth data and falling inflation could see other policymakers join them.

But many economists believe better news on the UK jobs market and signs of improving sentiment in key areas of the economy may stay the Bank’s hand.

The preliminary reading for purchasing managers index (PMI) showed Britain’s private sector returned to growth for the first time in five months in January.

And in another dose of encouraging news, the EY Item Club’s winter economic forecast being published on Monday reveals the outlook for the UK economy has improved over the past three months.

It has upgraded its growth forecast to 1.2% for 2020 from the 1% previously predicted, though it marks a slowdown on the estimated 1.3% seen in 2019.

The EY Item Club forecasts rates to stay on hold at 0.75% for the next 18 months, but stressed the MPC’s decision “looks to be on a knife edge and is very hard to call”.

The Bank’s latest forecasts – due alongside Thursday’s rates decision -will also be watched closely for changes to the growth and inflation outlook.

It comes after official monthly growth figures showed gross domestic product unexpectedly fell by 0.3% in November after a weak performance in the manufacturing sector.

This was followed by data showing inflation tumbling to a three-year low of 1.3% in December.

Bank governor Mark Carney has recently warned if growth does not pick up as expected, a “relatively prompt response” on rates would be needed.

And two of the external MPC members – Silvana Tenreyro and Gertjan Vlieghe – have hinted they are tempted to join the dissenters in calling for a cut.

Michael Saunders – one of two policymakers who voted to cut rates at the last two meetings – used a speech earlier this month to caution over the risk of a “low inflation trap” if the UK does not respond quickly should economic data worsen.

But odds on a cut in January were trimmed swiftly after solid jobs figures showed employment far outstripping expectations, hitting an all-time high of 76.3% in the three months to the end of November.

There was also cheerier news from the manufacturing sector, with the latest CBI survey showing confidence increased at its fastest rate on record in the three months to January.

James Smith, developed markets economist at ING, is forecasting for rates to be held on Thursday, with four of the MPC members at most voting for a cut.

“It’s a close call, but a recent post-election pick up in sentiment should be enough to see the Bank of England avoid cutting interest rates this month,” he said.