Bank of England's cautious tone is questioned, calls for aggressive interest rate cuts are growing louder.

The Bank of England is set to announce its rate decision on September 19 (Thursday), and despite seeming to ignore doubts and sticking to its tentative rate cut policy, more and more investors believe they need to take more aggressive action. Currently, the market widely expects Bank of England Governor Bailey and his colleagues to delay another rate cut on Thursday. However, fund managers from Abrdn Investment Management Ltd., Aviva Investors, and Allianz Global Investors are betting that this caution will not last for long amid slowing economic growth and budget tax hikes. Strategists from investment banks such as Goldman Sachs, HSBC, and UBS also agree with this view, believing that with the backdrop of continuing weakening economic growth in the UK, officials will soon be forced to increase their response. However, due to economists expecting data this week to show a resurgence in service sector inflation, cautious policymakers are unlikely to change their stance - even after the European Central Bank cut borrowing costs for the second time last week, while the Fed is expected to cut borrowing costs for the first time on Wednesday. The market currently expects the Bank of England to keep rates unchanged on September 19 and cut rates by 25 basis points in November and December respectively. Bhanu Baweja, chief strategist at UBS in London, believes it is just a matter of time before UK officials stop hesitating and make a more urgent response to the economic challenges facing them. "I think at this juncture, a contractionary monetary policy will have a faster impact than in Europe, and certainly in other places like the US," he said. The Bank of England did signal further rate cuts in August when it announced its first rate cut in over four years, bringing rates down to 5%. However, it insisted that it would not rush to cut rates as there was no threat of economic recession or soaring unemployment. On the contrary, the Monetary Policy Committee stated that, in the face of persistent inflation pressure, it would act cautiously and make decisions on a "meeting by meeting" basis. Dan Hanson and Ana Andrade of Bloomberg Economics stated, "The Bank of England is likely to keep rates unchanged at the September meeting, indicating that it is not yet convinced that inflation has been beaten and is intending to adopt a cautious easing policy." The market expects the Bank of England to cut rates seven times by early 2026, reaching a final rate of 3.25%. The consensus in the market is that the Bank of England's action will be slower than that of the Fed and the ECB, which has already resulted in higher borrowing costs for the UK compared to other countries. George Buckley, chief European economist at Nomura Securities, believes the Bank of England will cut rates only once per quarter, with the next rate cut likely to occur in November. He, along with many peers, believes officials will not change their guidance this week. The cautious reason for this is the unstable outlook for consumer price growth. Economists predict that data released on Wednesday will show that service sector inflation in August jumped to 5.6%. The Bank of England estimates that the current overall indicator of 2.2% will rise to 2.7% by December. The wage growth rate in the UK is still above the 2% inflation target at 5.1%, with data released last week indicating a strengthening labor market. However, the view that continued consumer price increases in the UK will ultimately hinder monetary easing does not convince Daniela Russell, head of UK rate strategy at HSBC. "We would query that explanation," she wrote in a report. "If the labor market continues to be as loose as before, the Bank of England may tolerate inflation slowly returning to target levels, hence cutting rates by more than expected." GDP data released last week may support this view. The data showed economic stagnation in July, meaning that the UK did not grow for three months out of the past four. Harriet Ballard, multi-asset investment manager at Aviva, said, "If the Bank of England delays easing policy, the economy will clearly slow down, indicating that further and faster rate cuts are to come. We still see risks for the UK economy as household consumption is still weak, mortgage costs may rise, and the labor market is cooling down." Analysts at Goldman Sachs, including the chief European economist Sven Jari Stehn, said in a report last week that they expect the Bank of England to cut rates continuously starting in November, rather than cutting every other meeting, eventually bringing the benchmark rate down to 3%. Baweja from UBS also has a similar final rate prediction. More and more investors are beginning to think this way. UK government bonds rose this month, outperforming their eurozone counterparts, as the market sees a higher likelihood of the Bank of England cutting rates twice more this year. The yield on two-year UK government bonds, sensitive to policy changes, fell by more than 30 basis points to 3.80%. The market has fully priced in a 25 basis point rate cut in November, with the likelihood of another rate cut in December increasing from 50% earlier this month to over 90% now. UBS stated that its bullish forecast for two-year UK government bonds has been one of the hottest trades in recent months. Abrdn stated last month that due to the inaccurate expectations of the money market regarding UK monetary policy, it has significantly increased its holdings of UK government bonds relative to European and US government bonds. Aviva stated a bullish view, while companies like Federated Hermes are also considering increasing their holdings. In addition to the deteriorating economic backdrop, investors have been encouraged by the prospect of UK Chancellor Rishi Sunak potentially raising taxes in the budget on October 30 as he tries to fill a 220 billion ($289 billion) public finance black hole. This would imply fiscal austerity. Orla Garvey, senior fixed income portfolio manager at Federated Hermes, said, "We will get what is effectively a tightening budget at the end of October. We have not fully priced in what we think will be a slowdown we will face."