The Bank of England (BOE) is preparing for a rate cut in its November 2024 meeting, lowering its key interest rate by 25 basis points to 4.75%. This comes after a hold in September and a quarter-point cut in August, signaling a shift in the central bank's approach towards managing inflation and economic growth. This upcoming move is closely watched by investors and traders as it could offer clues about the BOE's future policy direction, especially as the UK faces complex economic conditions.

UK Inflation Drops to Below Target

In September 2024, the UK’s annual inflation rate dropped to 1.7%, falling below the 2% target set by the Bank of England for the first time since April 2021. This decline marks a significant easing of inflationary pressures in the UK, which had been a primary concern for the BOE in the past year. However, while inflation falling below the target may seem like a positive development, it comes with its own set of challenges for the economy.

The Labour government’s recent budget introduced one of the largest fiscal expansions in recent years. This fiscal stimulus aims to boost economic growth but could also push inflation upwards in the longer term. The tension between these conflicting forces – falling inflation and fiscal expansion – will be central to the BOE’s decision-making process going forward.

Impact of the Fiscal Expansion and Future Rate Cuts

The UK government's fiscal expansion has raised concerns that it could drive inflation higher in the future, especially if it increases demand for goods and services at a time when the supply side of the economy remains constrained. This will be a key consideration for the Bank of England as it weighs its next moves. Even with inflation below the target, the BOE may need to remain cautious about accommodative monetary policy due to these potential inflationary pressures.

As a result, traders and investors will closely monitor any signals from the BOE regarding future rate cuts. Although the markets had initially expected another rate cut in December, those expectations have been scaled back. However, the current consensus is that three rate cuts are now **fully priced in by the end of 2025.

The BOE’s 2024 monetary policy will likely focus on balancing economic growth and inflation control. If the fiscal expansion continues to have a significant impact on inflation, the central bank may find itself in a difficult position. The Labour government's focus on infrastructure projects and public spending could provide the necessary stimulus to drive economic activity, but it might also limit the BOE’s ability to cut rates aggressively in the coming months.

The Influence of Trump’s Election Victory

Another factor that may weigh on the Bank of England's decision-making process is the potential economic impact of Donald Trump’s recent victory in the U.S. Presidential election. While it remains to be seen how Trump’s policies will affect the global economy, markets are closely watching any signs of geopolitical shifts that may affect trade, investment, and overall economic stability.

The Trump administration's stance on global trade and tax policies has the potential to disrupt not only U.S.-based markets but also European economies, including the UK. Brexit has already presented unique challenges for the UK, and further uncertainty in the transatlantic relationship could have both positive and negative impacts on the UK economy.

The BOE will likely assess these developments and their implications for the UK economy when determining its approach to monetary policy. Brexit-related risks, combined with the potential for further trade disruptions under a Trump administration, will be important factors in the Bank of England's policy decisions moving forward.

What Investors Can Expect

Looking ahead, traders will continue to monitor the BOE’s actions closely. While the rate cut in November 2024 is a near certainty, investors will likely focus on guidance for 2025 and the potential impacts of fiscal policy on inflation. The UK economy has shown resilience with inflation below target, but challenges remain on the horizon, especially with the large fiscal expansion and the potential consequences of a Trump administration.

Investors are also expected to continue tracking interest rate expectations, as the BOE could further adjust its rates if inflationary pressures resurface or if economic growth starts to show signs of stagnation. The market’s reaction to the UK fiscal policy and global economic shifts will play a pivotal role in shaping the trajectory of interest rates and the overall economic outlook in the UK.

Key Takeaways:

• Bank of England is expected to lower its key interest rate to 4.75% in November 2024 after a quarter-point cut in August.
• UK inflation fell to 1.7% in September, but the Labour government’s fiscal expansion could drive inflation up in the future.
• Traders are pricing in three rate cuts by the end of 2025, with attention on the impact of Trump’s victory on the UK economy and interest rate decisions.

As we move toward 2025, the Bank of England’s monetary policy will remain a critical element in managing the delicate balance between fostering economic growth and controlling inflation. How the global economic landscape, including the fiscal expansion and international policies, evolves will have a major impact on the UK’s economic stability and the BOE’s future rate decisions.

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