BoE: Quite the predicament - Standard Chartered

BoE cuts base rate by 25bps to 4.0% as expected; MPC split was more hawkish than expected. Upside inflation risks and downside labour-market risks exacerbate divisions on the MPC. There might be another cut in Q4, although it has become a close call between November and December. Further cuts in 2026 contingent on evidence of disinflation, labour loosening and restrictive fiscal policy, Standard Chartered's economists Christopher Graham and Saabir Salad report.

We still expect the next cut in Q4

"As expected, the Bank of England (BoE) cut the base rate by 25bps to 4.00% at its August Monetary Policy Committee (MPC) meeting; four MPC members voted for a hold and five for a 25bps cut. Taylor originally voted for a larger 50bps cut but changed to 25bps to facilitate a majority decision in an unprecedented second round of voting. The BoE's forward guidance was broadly consistent with recent policy meetings; it continued to include the phrase "gradual and careful" to refer to the further withdrawal of restrictive monetary policy."

"However, the BoE's updated macroeconomic forecasts and the closeness of the policy vote send a clear hawkish signal, and raise doubts over the pace and extent of further easing from here. A split MPC was expected given the divergence in recent economic data, with the resurgence in headline inflation set against the steady loosening of various labour-market metrics. This creates competing scenarios for the UK economy over the medium term and has exacerbated the divisions observed between MPC members in recent months. What was clear from today's meeting was a pervasive sense of uncertainty - not just arising from divergent economic data, but also about the appropriate pace of easing and where the neutral rate lies."

"We continue to expect another rate cut in Q4. We slightly favour November over December, but it has become a closer call between those two meetings. By the 7 November meeting, policy makers should have further evidence of labour-market weakness but are unlikely to know if inflation has peaked - the BoE now anticipates a peak of 4.0% in September, but the October data will not be released until after the November meeting. So, some MPC members may opt to wait for signs of falling y/y inflation."