Wednesday, November 6, 2024

Bank of England prepares to cut rates despite Trump election turmoil

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Economic data

The U.K.’s headline rate of inflation fell below the critical 2 percent level in October. Various other indicators of consumer activity point to ongoing weakness: The British Retail Consortium’s Shop Price Index has shown prices in outright deflation for the last three months, and its Retail Sales Monitor also suggests a very subdued trend in spending.

More broadly, the labor market has cooled significantly: Vacancies have fallen constantly for over two years and are now below their pre-pandemic high. Earnings growth, while still uncomfortably high, appear by most measures to be slowing.

All that supports a cut by the Bank on Thursday. But these factors now have to be weighed against a fiscally expansive budget, financed through a mix of taxes and borrowing, which the Office for Budget Responsibility has said is likely to raise growth and inflation over the next couple of years.

“The budget won’t change the Bank’s decision to cut rates again this week. But it does question our long-held view that rate cuts will speed up from now on,” reads an analyst note by Dutch bank ING. “A cut at the final meeting of the year looks fairly 50:50, and a lot will depend on the two inflation reports we get between now and Christmas.”

The BoE isn’t the only central bank that will have to struggle with parsing the election results this week. The U.S. Federal Reserve also begins a two-day meeting later on Wednesday, and it too is expected to announce a 25 basis point cut on Thursday.

Meanwhile, for Sweden’s central bank, which also meets on Thursday, the higher dollar (and its implications for “imported inflation”) might make the difference between a bold half-point cut in its policy rate or a more cautious quarter-point one, analysts say.

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