Archive

BoE: Policy Mistake Diagnosis

• Inflation expectations have been persistently too high, while productivity trends poorly, driving wage and price inflation forecasts to grind higher in recent years.
• The BoE’s cutting cycle contributed to reversing the trend decline in expectations, and in turning a slight overshoot into a massive one, with a 3.2pp revision since Feb-23.
• We forecasted this excess for these reasons, so it was predictable and therefore a policy mistake to cut so soon. Further surprise should prevent the MPC from cutting again.

By Philip Rush

RBA Cuts as Productivity Concerns Grow

• The RBA cut rates by 25bp to 3.60%, as expected, in the third reduction of 2025, with unanimous board support following July's surprise 6-3 hold pending inflation data.
• The central bank downgraded its productivity growth assumption to 0.7% from 1.0%, lowering medium-term GDP forecasts and signalling structural economic challenges ahead.
• The Governor signals that a "couple more" cuts are likely, with the cash rate path expected around 3.0% by 2026, while maintaining a data-dependent approach to future policy decisions.

BoE Cut Proves Finely Balanced

• Four MPC members refused to back the rate cut in August, and only one favoured a 50bp cut, but he was forced to vote for a 25bp cut to break the balanced 4:4 split.
• The group favouring a slower pace of easing may have expanded from 5:4 to 6:3, raising the hurdle to another cut. Four don’t even support the prevailing level.
• Inflation forecast revisions keep trending the profile higher. Rolling resilience in the broader data should keep the BoE on hold in November and beyond, like the ECB.

By Philip Rush

Banxico Delivers Expected Cut Amid Rising Risks

• Banxico cut rates 25bp to 7.75% as expected, with Heath dissenting again, maintaining a gradual easing pace despite core inflation sticking at 4.23%.
• The inflation outlook is mixed after the headline fell to 3.51% but core forecasts were revised up near-term with target convergence still expected in Q3 2026.
• Forward guidance stays data-dependent amid trade tensions. Further cuts are likely, but the pace is contingent on inflation progress and economic slack.