By William Schomberg
LONDON, Dec 15 (Reuters) - The Bank of England looks set for a knife-edge vote on interest rates this week with Governor Andrew Bailey expected to change his view and tip the balance for a cut.
Barring a major surprise in economic data ahead of Thursday's announcement, the BoE's policymakers will vote 5-4 to lower the central bank's benchmark rate to 3.75% from 4.0% according to most analysts polled by Reuters.
That would be the first reduction since August and would take borrowing
costs to a three-year low.
With Britain's inflation rate still the highest among the Group of Seven economies, BoE policymakers voted 5-4 in November to keep borrowing costs on hold.
MPC SPLIT, GOVERNOR VOTE IS KEY
Public comments from Monetary Policy Committee members since then have suggested that they remain split on whether job losses or inflation pressures pose the biggest risk to the economy.
However, Bailey has spoken only briefly about interest rates since he hinted last month at the possibility of voting for a rate cut if there was evidence of falling inflation.
Subsequently, Britain's headline inflation rate eased to 3.6% in the 12 months to October - still a long way above the BoE's 2% target but its first fall since May.
Data for November due on Wednesday - a few hours before the MPC's vote - is expected to show inflation edged down further to 3.5%, according to the Reuters poll.
Similarly, pay growth has slowed and is expected to ease off again in fresh figures on Tuesday. On the same day, S&P Global's survey of purchasing managers will give an early sense of how businesses are responding to finance minister Rachel Reeves' budget on November 26.
Andrew Goodwin, chief UK economist at Oxford Economics, said Thursday's rates decision was probably a much closer call than the 90% probability of a cut which is priced by investors.
"But it's notable that Bailey has chosen not to push back against expectations of a December cut," Goodwin said.
With Britain's inflation rate still close to double its 2% target, the BoE has been unable to move as quickly as the European Central Bank to bring down borrowing costs. The ECB's benchmark borrowing rate now stands at 2%, half that of the BoE.
Now, as major central banks signal that they might be close to halting their rate cuts - the Federal Reserve last week signalled one more next year while the ECB might already be done - the BoE is expected to adopt a cautious stance in 2026.
Investors and most analysts polled by Reuters currently expect only one rate cut in 2026.
Dani Stoilova, Europe economist with BNP Paribas, said the BoE was likely to remain wary about inflation and it might drop its guidance that rates are likely to fall gradually after a cut on Thursday.
"Specifically, removing reference to a 'gradual downward path' would maintain the broader message but give the MPC more flexibility," she wrote in a note to clients.
While Reeves' budget is likely to lower inflation by around half a percentage point, that impact will be temporary.
Britain's economy slowed before the budget as consumers and businesses worried about tax increases.
That feeling of uncertainty might have shifted to the political outlook with Prime Minister Keir Starmer's shaky authority over his Labour Party facing a test in local elections in May.
"While the BoE is unlikely to embed this rising uncertainty in its projections just yet, we think it adds to the list of potential downside risks that support the case for a December cut," Stoilova said.
(Writing by William Schomberg; Editing by Toby Chopra)
