Why I’m not cheering the pre-Christmas rate cut
Valiant though it is to support the economy, the MPC should be laser-focused on fighting inflation—especially now, with global investors who buy billions of pounds of UK government debt each month fast losing faith. The Bank of England’s decisions reverberate beyond the gilt market, shaping confidence in the UK’s ability to reconcile growth with price stability. A pre-Christmas rate cut, while politically appealing to borrowers, risks undermining that credibility at a delicate moment.
The core problem: inflation remains the key risk
At the heart of the argument against an early cut is simple: if inflation is not under control, any growth impulse from lower rates may prove temporary, and the economy could suffer a renewed squeeze when prices rebound. The MPC’s mandate is price stability with a mindful eye on growth, but inflation expectations—both inside the household sector and among financial market participants—are the sentinel that should guide policy. A premature cut could embolden demand just as the supply side is stressed by energy costs, global supply disruptions, and lingering post-pandemic frictions.
Markets are signaling unease
Global investors buying billions of pounds of UK government debt each month are increasingly cautious. A rate cut now might be interpreted as the Bank signaling comfort with higher debt issuance and potential fiscal looseness. In turn, this could push up the cost of financing for the government and households, and could prompt a higher risk premium on gilts. The credibility of the Bank hinges on its ability to anchor inflation expectations; swerving toward a pre-Christmas cut could threaten that credibility and trigger more volatility in the gilt market.
Growth vs. price stability: finding the right balance
The economy could benefit from stimulus when growth is weak and inflation is clearly on a downward trajectory. Yet in the current climate, growth remains uneven, and consumer confidence is fragile. A rate cut might provide a small lift to demand, but it risks feeding the inflation cycle if it is not matched by a commensurate decline in price pressures. The MPC must resist political pressure and stay disciplined, using monetary policy to cool demand only to the extent that inflation is clearly trending lower and expectations are well anchored.
What a responsible path looks like
A cautious approach would prioritize inflation data, wage dynamics, and the trajectory of energy prices. If the Bank sees credible disinflation materializing over the coming quarters, a measured easing could be justified. The key is gradualism, transparency, and clear communication about the conditions under which policy will shift. Forward guidance should emphasize that any loosening is conditional on a durable move in inflation toward target, not a knee-jerk response to softer growth data.
Communication matters as much as policy
Clear, consistent messaging from the MPC reduces uncertainty for households and businesses. If the Bank signals that the path of policy is data-dependent and will react to persistent inflation rather than short-term dips in activity, markets will better calibrate their expectations. In this framework, a pre-Christmas rate cut would be a low-probability event unless price pressures visibly wane and inflation expectations stay anchored.
A note on debt markets and credibility
The Bank’s credibility rests on its ability to maintain price stability while supporting sustainable growth. When investors question the central bank’s willingness or ability to curb inflation, the cost of borrowing rises, and the fiscal arithmetic worsens. A prudent, data-driven stance—rather than an overtly expansionary move in the near term—helps preserve financial stability and ensures the UK economy remains competitive on the global stage.
Bottom line
There is a meaningful place for easing if the inflation outlook evolves in a favorable direction. Until then, capital markets and households need the reassurance that the Bank will not compromise its inflation mandate for political convenience. A pre-Christmas rate cut at this juncture risks undermining credibility and sowing longer-term instability, even as it offers a temporary reprieve for borrowers.
