BoE can get ahead of the curve with half-point cut

Policy moves: People walking in front of the BoE in London. Any shift toward a more aggressive stance by the central bank rests with governor Andrew Bailey, since the internal members tend to move as a unit. — Bloomberg

THE Bank of England (BoE) interest rate policy meeting yesterday benefits from being accompanied by a quarterly economic review.

The Monetary Policy Committee (MPC) will have its latest outlooks on the economy and inflation at its fingertips.

The ducks are forming in a row, and they’re quacking about everything slowing down – including consumer price increases and growth.

This ammunition should embolden policymakers into cutting the 4.5% official interest rate by 50 basis points (bps), rather than just the quarter-point trim anticipated in the futures market.

The balance of economic risks has clearly turned in an unfavourable direction; that calls for a more aggressive approach to give the economy a fighting chance.

Bloomberg Economics expects the short-term inflation outlook to be revised significantly lower, bringing forward the date when the BoE’s 2% target is reached.

The growth outlook is also poised to worsen as tariffs impinge on the scenario in the months and quarters ahead.

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As an additional kicker, crude oil prices have declined even further since the central bank compiled its forecasts.

Admittedly, a larger interest-rate cut is something of a long shot, as central banks rarely like to surprise; September’s half-point reduction from the Federal Reserve didn’t land smoothly.

With so much global uncertainty about US tariffs alongside a muddled domestic picture of higher taxes, above-target services inflation and an utter lack of clarity over the labour market, sticking with their slow-but-steady quarterly pace of 25-bps cuts is undoubtedly a safer option for UK policymakers.

Nonetheless, the MPC is fully aware monetary policy is restrictive.

Its guidance is that it wants to get close over the coming year to the neutral rate, the mythical point where monetary policy supposedly balances the twin needs to bolster growth and subdue inflation.

According to its March Market Participants Survey – which the BoE hasn’t pushed back on – that pivot point is an interest rate somewhere around 3% to 3.5%.

The question is how speedily to get there.

The European Central Bank has set a faster pace, taking a more aggressive approach over the last six months by cutting at every meeting to put borrowing costs at 2.25%.

By the time it meets again on June 5, it’s poised to have halved its official interest in eight steps in about a year; if it moves as expected this week, the BoE will have eased just four times in the same period.

The door is partially ajar, with several committee members expressing concern of late on how the economic outlook is souring.

Tariff wars do odd things to inflation, albeit exporting countries usually suffer from disinflationary impulses, but the downward effect on growth is pretty universal. This is predominantly the BoE’s thinking.

As the United Kingdom is such an open economy, the MPC will be particularly mindful of April’s International Monetary Fund downgrades to global growth.

Another factor policymakers in both the United Kingdom and the eurozone need to take into account is what happens to all those Chinese goods which were destined for the United States; with porous trade barriers, the likelihood is more will be headed our way, adding to disinflationary impulses.

Any shift toward a more aggressive stance rests with governor Andrew Bailey, since the internal members tend to move as a unit.

But the external members are shifting towards more proactive rate cuts being needed this year.

Arch-dove Swati Dhingra may be joined again by the recent dovish convert Catherine Mann and possibly the newest member Alan Taylor.

Deputy governor Dave Ramsden had been on the dovish wing some of last year, though he has more recently turned neutral, but he’s a potential half-pointer.

That may leave Bailey with the deciding vote, potentially combining with Deputy governors Clare Lombardelli and Sarah Breeden.

Furthermore, it all depends whether the BoE wants to get ahead of the curve on turning monetary policy to neutral from restrictive. And sometimes, the less-risky course of action is to act decisively. — Bloomberg

Marcus Ashworth is a Bloomberg Opinion columnist covering European markets. The views expressed here are his own.