TDS expects the MPC to cut the Bank rate by 25 basis points with a 7-2 majority, and leave guidance relatively unchanged, implying a cautious approach to future cuts. The MPC’s treatment of the recent budget will have important consequences for the market’s interpretation of future policy moves. A BoE cut is well priced in and unlikely to be a big boost for the Pound. Markets are likely to continue digesting the results of the US election, TDS analysts note.
Three scenarios to consider
“Hardline (20%, +10bp, +15bp, +0.40%). The MPC takes the OBR estimates of the budget impact at face value, and increases inflation and growth more than “We expect it to cut rates, leave guidance unchanged, but the size of improvements in growth and inflation over the forecast horizon suggests a slower pace of rate cuts.”
“Base case (70%, -6bp, -8bp, -0.10%). MPC cuts rates in a 7-2 vote and maintains its cautious guidance that cuts are likely to continue, but without any sign clear of time, leaving a pause in December firmly on the table. The projections incorporate a less worrying impact of inflation from the recent budget, with softer inflation in Year 1, and projections largely unchanged elsewhere. Year 2 and Year 3 inflation remains below the 2% target.”
“Dovish (10%, -10bp, -15bp, -0.50%). MPC cuts rates in a more definitive 8-1 or 9-0 vote, pointing to recent rapid decline in inflation as a reason to be prepared for more cuts in the future. Although there is no explicit signal of a cut in December, the tone leaves the door wide open for a cut then, and in subsequent meetings.”
Source: Fx Street
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