Bank of England rate setters may surprise markets by cutting the base rate by 25 basis points from 4% to 3.75% next week, several major banks said.
Goldman Sachs said a weakening economy, lower inflation expectations and lower wage growth could lead the bank’s monetary policy committee to cut borrowing costs when it meets next Thursday.
Bank of America is expected to vote 5-4 to cut interest rates by 25 basis points, with Governors Andrew Bailey, Swati Dhingra, Alan Taylor, Sarah Breeden and Dave Ramsden voting in support of the move.
Official data showed last week that inflation unexpectedly remained at 3.8% in September for a third consecutive month, compared with expectations for inflation to hit 4%.
The latest data shows average wage growth in the three months to August was 4.7%, down from 4.8% in the three months to July.
The UK economy grew by 0.3% in the three months to August.
“Overall, we believe the data provide a compelling case for a rate cut next week, as key indicators have weakened significantly since the September meeting,” Goldman Sachs analyst James Moberly said.
At that meeting, the MPC voted 7-2 last month Keep bank interest rates unchanged at 4%only Alan Taylor and Swati Dhingra pushed for a 25 basis point cut in interest rates to 3.75%.
Barclays and UniCredit also said they may cut interest rates next week.
UK chief economist Jack Mining said: “As early as September, the committee was weighing the balance of risks on both sides of the inflation outlook.
“We think data since then, as well as signals about future changes in fiscal policy, will shift the balance and give the committee greater confidence that deflation is underway.”
Economists noted that the Monetary Policy Committee was divided over whether the rise in inflation was due to temporary increases in food and energy costs or lower long-term service and wage costs.
Earlier this month, Hugh Peel, the central bank’s chief economist and a member of the Monetary Policy Committee, said high service prices and wages were making inflation much “stickier” than central bank policymakers had previously predicted.
Peel added: “While I expect the Bank to cut rates further over the coming year if the economic and inflation outlook develops as broadly as the Monetary Policy Committee expects, it remains important to guard against the risk of cutting rates too far or too quickly.”
Sanjay Raja, chief UK economist at Deutsche Bank, believes that although the Monetary Policy Committee’s decision will be “very balanced”, the committee will keep the benchmark interest rate at 4%.
Raja added: “We think centrists on the MPC want to see three things before easing restrictive policy again: a shift in inflation expectations; details on the impact of the autumn budget on inflation; and, most importantly, signs that pay settlements are approaching 3%.”
