Bank of England prepares to cut rates despite Trump election turmoil

LONDON — Ostensibly, when the Bank of England’s Monetary Policy Committee meets on Thursday, its attention will be focused squarely on Britain’s economic position, unbothered by the goings on in the wider world.

In reality, Threadneedle Street won’t be able to ignore the seismic changes represented by the return of Donald Trump to the White House. The market is already feeling the effects: yields on 10-year U.K. bonds rose by nearly 0.1 percentage point, while stocks rallied across Europe on the expectation of lower taxes and more spending in the world’s largest market.

The president-elect has promised a resumption of a trade war that he began during his first term. Great Britain might be an island nation, and might like to think of itself as the U.S.’s closest ally, but as a middling, open economy it’s very much exposed to the vagaries of the global one. Moreover, its new center-left government can expect no favors from a man whom its members have vilified for most of the past decade while in opposition.

An analyst note by investment bank Goldman Sachs published on Wednesday forecast a hit of 0.4 percent to U.K. gross domestic product from Trump’s trade policy, spread out over several years.

But while those considerations are likely to feature in how the Bank’s assessment of the longer-term outlook, analysts say that in the immediate future, the BoE is almost certain to cut its key Bank Rate by 0.25 percentage point to 4.75 percent when it meets Thursday.

“We still think a November rate cut is a done deal,” said Deutsche Bank’s Sanjay Raja in an emailed comment. However, the combination of the U.S. election and the recent budget presented by Chancellor Rachel Reeves — which will result in extra £70 billion in spending next year — create new uncertainties for Governor Andrew Bailey.

“The question now is how the MPC reacts to both the increase in government spending alongside the rise in geopolitical uncertainty as it pertains to trade,” Raja added.

UBS Europe economist Anna Titareva agreed. She added, however, that the vote could be close, with three or even four of the MPC’s nine members voting against a rate cut.

In August, Bailey cast the deciding vote to cut in an unusually close 5-4 decision, and a repeat of that could cement divisions between hawks and doves in the Bank’s policy committee — especially if the Bank’s top management again votes against the recommendations of its chief economist, Huw Pill.

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.