BOE’s Bailey Must Soon Show If He’s With Hawks or Doves

Andrew Bailey

(Bloomberg) -- Bank of England Governor Andrew Bailey arrives in Washington this week under even more than the usual scrutiny. He’s now clearly the key vote on a sharply divided Monetary Policy Committee.

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The governor has the opportunity to signal his allegiances in two appearances alongside the International Monetary Fund and World Bank meetings at a time when a number of prominent economists have started warning that markets are underpricing the chance of further interest-rate cuts this year.

Bailey is seen as the crucial swing voter on the nine-strong MPC which is split between four hawkish officials who oppose more reductions and four more dovish rate-setters keen to keep easing hopes alive.

The split reflects different views on whether a spike in inflation to almost double the BOE’s 2% target will cause price pressures to linger and make any attempt to lower borrowing costs too risky. Two of Bailey’s deputies, Sarah Breeden and Dave Ramsden, have in recent weeks played down the threat and said that underlying inflation remains on track.

Expectations surrounding Chancellor of the Exchequer Rachel Reeves’ autumn budget, which she unveils on Nov. 26, three weeks after the meeting, are also seen as crucial for guiding the panel.

Bailey has struck a very fine balance in recent comments, saying that the rates which govern millions of Britons’ borrowing costs need to be lower but has warned, “exactly when that will be, and how much it will be, will depend on the path of inflation going down.” He has also signaled that he is content with market pricing that sees little prospect of a cut before the end of the year.

Investors have all but ruled one out at the next meeting in November and see around a 20% chance of a cut in December. However, some economists, including at Barclays, Nomura and TD Securities, still believe that a move before the end of the year is in play.

Jack Meaning, chief UK economist at Barclays, told Bloomberg Bailey seems “genuinely torn between the two camps.” He highlighted tightening financial conditions and the potential for upcoming gross domestic product and labor-market data to disappoint.

If those conditions transpire and inflation remains consistent with the MPC’s expectations that inflation will peak in September and then gradually cool by the end of the year “then, on balance, we think it could sway Bailey to lean to the more dovish side,” he added.

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James Rossiter, head of global macro strategy at TD Securities, is among those who view markets as significantly under-pricing the odds of a cut. “There are clearly some on the MPC who are comfortable with the quarterly pace,” he said, adding that “it’s somewhat up to data surprises to dictate the way things go.”

Bloomberg Economics BOESPEAK index, an automated model that tracks the interest-rate sentiment within MPC comments, has moved in a more hawkish direction in recent weeks after gauging a dovish stance from the panel over the summer. It still places Bailey’s recent remarks as tending toward the doves.

The timing of next month’s meeting complicates the BOE’s thinking, since it comes two weeks after September inflation data that is expected to show price growth hitting 4%, and with the budget looming.

That means the period between November and December’s meetings may be crucial. It’s a time when the MPC will receive two rounds of inflation and jobs data.

In addition, the BOE will be watching the budget closely after Reeves was blamed for driving inflation higher with her increase to payroll taxes in April. Another raft of the tax hikes that are widely expected could cut both ways, depending on whether they are seen as more likely to fuel price pressures or subdue the economy further.

The current market pricing “is not a lot for a central bank that has a history of surprising,” said George Buckley, chief UK economist at Nomura.

“A lot really depends how much the tightening announcements in the budget will be upfront versus how much will be delayed until future years,” he said. “If they front-load it, then that will appear in the BOE’s forecast into GDP and that will pull down ultimately on inflation.”

Interest rates will likely hold at 4% for the fourth quarter of 2025, according to the consensus view of 34 economists surveyed by Bloomberg. The forecasters mostly expect the next cut in 2026, when they predict quarterly cuts until the base rate settles at 3.25%, according to the survey published Monday.

--With assistance from Will Standring.

(Updates survey data in final paragraph.)

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