By Andy Bruce
Investors are eagerly awaiting the Bank of England's September meeting for insights into future monetary policy decisions, as well as a crucial decision on the pace of its bond sales - a topic of political interest.
All 65 economists in a Multibagger poll predict that the BoE will maintain rates at 5.0% on Sept. 19, following a recent cut from a 16-year high of 5.25% in August.
While wage growth has slowed and the economy stagnated in July, the Decision Maker Panel indicated a halt in the decline of wage growth expectations. Additionally, upcoming data is expected to show inflation above the central bank's target of 2%.
Market expectations currently imply a 20% chance of an interest rate cut next week, with a full 0.25 percentage point cut priced in for November.
Despite strong wage growth and service sector inflation, investors believe the BoE will adopt a cautious approach compared to the U.S. Federal Reserve, and similar to the European Central Bank, which recently cut rates.
According to economists at Nomura, the BoE's slim margin of 5-4 in favor of holding rates in August, combined with positive business surveys, suggests a hold decision next Thursday, with a potential rate cut in November.
Quantitative Tightening: A Key Focus
Bond investors are eagerly anticipating the BoE's decision on the pace of its quantitative tightening (QT) program, which involves unwinding past bond purchases to stimulate the economy.
Last year, the MPC decided to reduce its stock of gilts by £100 billion through a combination of active sales and allowing bonds to mature.
Despite criticism of the QT program due to potential losses for the BoE and taxpayers, the central bank may accelerate the program on Thursday, given the high volume of gilts maturing naturally in the coming year.
BoE Governor Andrew Bailey has emphasized the importance of QT for maintaining the central bank's ability to intervene in the economy if needed.
Most forecasters expect the BoE to maintain QT at £100 billion per year, but an increase to £115-120 billion is plausible, according to Chief UK Economist Andrew Goodwin.
Finance Minister Rachel Reeves is likely to closely monitor the QT decision, as it impacts the state's budget. Reeves may adjust fiscal rules to exclude the impact of the BoE's QT program in the upcoming budget, providing more fiscal flexibility.
Overall, the BoE's upcoming decisions on interest rates and bond sales will have significant implications for investors, businesses, and taxpayers alike. Understanding these decisions and their potential outcomes is crucial for anyone with a stake in the UK economy.