Bank of England on the Brink: Debating Rate Cuts Amid Fiscal Tightening

The Bank of England is contemplating a quarter-point rate cut despite sub-par growth and fiscal tightening as inflation decreases. A divided vote in the policy council poses challenges. The Fed has already lowered rates, pressuring the BoE to consider faster cuts amid structural challenges in the UK economy.

The Bank of England is under pressure to play catch-up with its monetary policy amid a sub-par economic growth, a weakening labor market, and tightening fiscal policies. This comes as inflation in the UK sees a rare positive surprise with its significant decrease in November.

Analysts, including Sanjay Raja of Deutsche Bank, predict a likely rate cut as early as Christmas, with more cuts expected in 2026. However, internal divisions in the BoE's policy council, highlighted by a narrow 5-4 vote in favor of a quarter-point cut to 3.75%, add complexity to the situation.

Despite positive inflation figures, there's a pressure for the BoE to lower rates more swiftly. The Fed's recent rate cuts amplify this pressure, as stark differences in scale and growth pace between the US and UK economies become evident. Potential structural challenges from Brexit and other factors make rapid rate adjustments risky.

(With inputs from agencies.)