UK tax backtracking and calmer markets will limit rate rise
UK government’s U-turns on tax cuts, the prospect of further fiscal policy tightening, and calmer financial markets mean the Monetary Policy Committee (MPC) faces less pressure to increase interest rates aggressively. We expect the committee to raise Bank Rate by 75bps to 3% at the November meeting.
What you will learn:
- The MPC still faces a difficult balancing act in arriving at its decision. Many economic indicators have weakened since the committee last met in September, but the jobs market has remained tight and pay growth strong. The decision to replace the cap on household energy bills next April with more targeted support makes forecasting inflation harder.
- The MPC will likely reaffirm the Bank of England’s plans to sell gilts purchased under the quantitative easing programme, due to start on November 1. But policymakers may be taking an unnecessary gamble, as there is no pressing reason to kick off quantitative tightening and bond sales run the risk of triggering renewed turmoil in the gilts market.
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