Bank of England’s Cautious Tone Questioned ⁢Amid Calls for Aggressive Interest Rate Cuts

The Bank of England is set to announce its interest rate decision on Thursday, September 19. Despite the central bank’s tentative interest rate cut policy, many investors believe that more radical actions are necessary.

Bank of England ⁢Governor Andrew Bailey and his ⁢colleagues ‍are expected to hold off on another⁢ rate cut on Thursday. However, fund managers at Abrdn Investment ‍Management Ltd., Aviva Investors, and ⁣Allianz Global Investors are betting that caution ⁢won’t last​ long⁣ amid⁣ slowing growth and a budget of higher taxes.

Strategists​ at investment banks, including Goldman Sachs,‌ HSBC, and UBS, agree that officials will soon be forced to step up their ⁣response as Britain’s economic growth​ momentum ‌continues to weaken.

The market currently expects the Bank of England to keep interest rates unchanged at its decision ⁣on September 19 and cut rates by 25 basis points in November and December. Bhanu Baweja, chief strategist at UBS in London,‍ believes it is only a matter of time⁣ before British officials stop hesitating and respond more urgently to ⁢the dangers facing the economy.

“This is a place where ‌I think⁣ tighter monetary policy⁣ will‌ have a quicker impact than in other places like Europe and certainly the United States,” he ‌said.

The BoE did signal further rate cuts in August when⁣ it announced its first rate cut in more‌ than four years to⁤ 5%. However, it⁢ insisted it would not rush to do so because‌ there was no threat of a recession or a surge in⁤ unemployment.

Instead, the MPC ⁣said it⁤ would proceed cautiously, making decisions on a “meeting-by-meeting” basis amid ‌lingering underlying inflationary pressures.

Markets expect the Bank‍ of England to cut interest ‌rates seven times by⁢ 25 basis points by early 2026, bringing the‌ final rate to 3.25%.

The current market consensus ‍is⁤ that the Bank of England will act slower than the Federal Reserve and ‍the European Central Bank, which has already resulted in higher borrowing costs in the UK than in other countries.

George Buckley, chief European economist at Nomura Securities, believes the Bank of England⁤ will cut rates just once a quarter, with the next cut coming in November.

The reason for this caution is the shaky outlook for consumer‍ price growth. Economists predict that data on Wednesday will show that services inflation jumped to 5.6% in August.

Britain’s ⁣wage growth remains above its‍ 2% inflation target at 5.1%, and data released last week⁢ showed some strengthening in the labor market.

However, the view that continued rise in UK consumer prices will ultimately hinder monetary easing is not convincing to Daniela Russell, HSBC’s head of UK rates strategy.

“We would question this interpretation,” she wrote in a note. “If the labor market continues to be as accommodative as before, the Bank of England may tolerate a⁢ slow return of inflation to target and therefore ⁤cut interest rates more sharply than expected.”

That view ⁤may be supported by⁤ last week’s gross ‌domestic product figures, which showed the economy stagnated in ⁢July, meaning the ​UK had no growth⁣ in three of the past four months of data.

Harriet Ballard, multi-asset portfolio manager at Aviva,‌ said:‌ “If the Bank of England‌ delays easing policy, then the economy will decelerate significantly, suggesting faster and deeper ‍rate cuts ‌later. We still ⁤see risks to the UK economy as household‌ consumption remains weak, mortgage costs are likely to rise, and⁤ the labor ​market is cooling.”

Goldman Sachs analysts, including chief European​ economist Sven Jari Stehn, said in a report last week that they expect the Bank of⁤ England to cut rates back-to-back from ​November, rather than every other ‍meeting, eventually taking the benchmark rate to 3%.

More ⁣investors are starting to think so. British‍ government bonds have risen this month, outperforming‌ their euro zone peers,⁤ as markets price in a greater chance of two more rate cuts from the⁤ Bank​ of ‍England this year.

The policy-sensitive two-year Treasury yield‍ fell more than⁣ 30 ⁢basis points to ⁢3.80%. The ‌market has⁢ fully digested a ⁤25 basis point rate‍ cut in November, and the probability of another rate cut in December has risen⁤ from 50% ⁤at the beginning of this month to more than 90% now.

UBS said its bullish forecast for two-year⁢ gilts has been one of ⁢its hottest trades of the past few months.

Abdullah said last month it was “significantly” overweight UK gilts relative to‌ European and US government bonds because money market expectations of UK monetary policy were inaccurate. ⁢Aviva has expressed ⁤bullish views, while⁢ Federated Hermes and others‌ are‍ also considering adding to their ⁤holdings.

In ⁢addition to the deteriorating⁤ economic backdrop, investors⁣ were also encouraged by the prospect that British Chancellor of the Exchequer Rachel ⁣Reeves could raise taxes in ⁣her Oct. 30 budget as she‌ tries to plug ⁢a ⁣22 billion pound ($28.9 billion) black hole in public finances. That would mean fiscal tightening.

“We’re going to ‌get what ‍is effectively an austerity budget at the end of ‌October,” said Orla Garvey,‍ senior fixed income portfolio manager at Federated Hermes. “We don’t fully price in the slowdown that I think we’re going ⁤to face.”