“External shocks have abated,” helping to facilitate the disinflation process.
So said the Bank of England on Thursday, in the course of delivering the second rate cut of the cycle. Knock on wood. The “external shocks” are piling up again. Donald Trump’s back and the German government collapsed this week. I suppose neither of those events counts as a “surprise,” but the point is just that we live in a world of rolling tumult, and as such, the BoE shouldn’t get too comfortable vis-à-vis the external environment, to say nothing of another domestic fiscal fracas.
The vote split was 8-1 at the November gathering. After a fractious period defined by split decisions, the MPC’s beginning to exhibit the trappings of consensus. The statement which accompanied September’s decision to skip a meeting before braving another cut suggested that meeting was also a relatively harmonious affair. The BoE, you’re reminded, cut rates for the first time since the pandemic at the August meeting, at which four dissenters preferred to hold Bank rate at the highest since 2008.
The simple figure above stands as a testament to the truly harrowing nature of the UK’s inflation fight. Among developed nations, the UK arguably had the hardest time coping with an unforgiving post-pandemic, war-era macro regime. I’d gently suggest the country’s domestic political discord exacerbated the situation materially.
Obviously, Rachel Reeves’s budget didn’t go over especially well with bonds, and pundits with an axe to grind — a group that includes some Wall Street “strategists,” whose job descriptions absolutely don’t include a mandate to carry on about politics, let alone in a way that suggests hyper-partisanship — are keen to castigate Reeves as though doing so somehow exonerates Liz Truss for one of the worst fiscal boondoggles in living memory.
I’m going to say this one more time: Truss is a legendary moron. Defending her makes you one too. Don’t be that person. History will always remember Truss as a laughing stock. Her picture’s in the dictionary next to “failure.” No amount of apologizing — no belabored efforts to pen a revisionist history of her short-lived premiership and the gilt crisis her mini-budget facilitated — is going to change that. If she were Labour instead of a Tory, I’d say the exact same thing. A moron’s a moron. And she’s a moron.
With that out of the way, the BoE’s again staring at a bond market upset with the government, and that does have to be taken seriously. Andrew Bailey said Thursday that the MPC will just have to “wait and see” how Reeves’s budget impacts the macro outlook and thereby the BoE’s decision calculus. He also indicated the UK’s latest budget drama doesn’t appear likely to impact the rate path, which is probably going to reflect a shallower cutting cycle either way. The budget’s going to be near-term inflationary, but who knows after that.
The new inflation forecasts showed CPI running 2.8%, 2.7% and 2.6% in Q3 2025, Q4 2025 and Q1 of 2026, respectively. Those projections were 2.4%, 2.2% and 2% in the August forecasts. Indeed, the path shifted up across the entire forecast horizon looking out beyond Q2 of next year.
As the figure above, updated with November’s projections, reminds you, the BoE hasn’t a clue on this. The pale yellow triangles are the new projections. The pale pink circles are August’s.
Services inflation remains far too warm in the UK, but broadly speaking, the BoE’s in a much better place now. Still, the outlook’s highly uncertain and that’s not just a throwaway line: The UK really has had a uniquely difficult time managing the 2020s macro regime.
ING helpfully noted that the new projections “don’t account for the market reaction to the latest budget.” “The numbers are based on market rates averaged out over several days up until October 29, the day before the budget was announced,” the bank’s James Smith wrote, adding that markets have since taken nearly two quarter-point cuts out of the curve. “If the models were run again today, the upward forecast revisions to growth and inflation would be more muted,” Smith added.
Whatever the case, both the BoE and markets generally expect the cutting cycle to proceed very cautiously relative to the UK’s peers. “A gradual approach to removing policy restraint remains appropriate,” the bank said Thursday, reiterating that policy “will need to continue to remain restrictive for sufficiently long until the risks to inflation returning sustainably to the 2% target in the medium term have dissipated further.”
Reeves weighed in. “Interest rates are now on a downwards path,” she said. Bailey didn’t sound so sure. “We need to make sure inflation stays close to target,” he remarked. “We can’t cut interest rates too quickly or by too much.”
