The focus this past week was on Rachel Reeves and her seismic Budget, and now it's over to the Bank of England to see what the nine members of the Monetary Policy Committee (MPC) make of the Chancellor's decisions on tax and spending.

The MPC will gather next week for the seventh of its eight scheduled meetings in 2024, with an announcement due on Thursday as to whether they will resume the downward path in interest rates. The last quarter-point cut in August, taking the base rate down to 5%, brought an end to 18 months of hiking the cost of borrowing which has strained the finances of consumers and businesses alike.

The prevailing view is that another quarter-point cut is a sure bet following a sharp drop in inflation to less than 2% and a big slowdown in wage growth. This has some predicting that the significant split between the committee's doves and hawks could be wiped out with the possibility of a unanimous vote in favour of a November rate cut.

Read more:

What happens thereafter is less of a certainty. Whereas a week ago many economists were pencilling in back-to-back rate cuts in November and December, it now looks as if the Budget could push the MPC's more cautious members back into their shell.

According to calculations by the Office for Budget Responsibility (OBR), the Budget will deliver "a sustained loosening of fiscal policy" that runs counter to the war on inflation which the MPC has fought with its barrage of interest rate hikes. This change in outlook shortens the odds of a rapid decline in the cost of borrowing.

Headline pay growth - the major bugbear among the MPC hawks concerned about stoking the embers of cooling inflation - has fallen below 4% and while there is still some way to go before it reaches what many believe to be the ideal mark at 3%, analysts at RSM UK say evidence in mounting that pay gains are heading towards more sustainable levels. 

In addition, quarterly GDP growth slipped to just 0.2% in August, business surveys have softened, and business and consumer confidence has dropped sharply. Taken together it means there is less likelihood that an overheating economy keeps inflation sticky.

However, the OBR noted that by raising borrowing by almost £30 billion in 2025/26, the Budget will materially increase both growth and inflation. It now estimates that inflation will rise to 2.6% on average next year with the Budget measures adding 0.4 percentage points to inflation at its peak.

Read more:

Financial markets went from pricing in a 62% chance of a December rate cut the day before the Budget to a 28% chance the day after. For the period from December to September of next year, the consensus is rates will come down by a total of 63 basis points versus 100 basis points previously

“However, this looks like an overreaction," RSM said. "Based on the OBR forecasts, which were conditioned on interest rates falling to 3.9% by Q3 2025, inflation drops back to 2.1% by the end of 2026.

“We now think it is more likely that the MPC cuts [interest rates] by 25 basis points every quarter next year, leaving rates at 3.75% by the end of 2025. Given the neutral rate is probably around 3%, we don’t think the MPC will be overly concerned about reducing rates gradually until they are approaching that level.”