No Evidence BOE Decisions Swayed by Elections, Analysis Finds

(Bloomberg) -- The Bank of England could cut interest rates twice before the next UK general election, according to new analysis that found the political timetable hasn’t influenced past decisions by the central bank.

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The prospect of an election later this year has fueled speculation that the BOE might hold off reducing rates from their current 16-year high of 5.25%. Financial markets are currently pricing in just one quarter-point cut by the end of September after a stronger-than-forecast inflation reading this week.

Prime Minister Rishi Sunak has said he expects to go to the polls in the second half, and Chancellor Jeremy Hunt has hinted an election could be held as early as October. If it were, BOE policymakers due to meet mid-September could find themselves voting on whether to cut rates in the middle of an election campaign.

However, analysis by Bloomberg Economics found scant evidence that the operationally independent BOE yields to political pressures prior to elections. If anything, the bank has tended to adhere more closely to economic fundamentals.

“There’s little evidence that politics has influenced the BOE’s decision-making — as one would expect from an independent central bank,” said economist Dan Hanson. “The central bank has stuck more closely to our policy rule in the months prior to an election than it has on average across the whole sample.”

BE analyzed the BOE’s actions in the months leading up to past general elections since 1997, when it gained independence. It looked for deviations from a policy rule based on the central bank’s main model — which links interest-rate movements to economic fundamentals like inflation and output.

The rule points to the BOE delivering 50 basis points of easing by the end of the third quarter, and 75 basis points by the end of the fourth, Hanson said. Markets, by contrast, see around 50 basis points by year-end.

Political pressure is building on the BOE to ease the cost of borrowing for households and businesses. While the economy is improving, the ruling Conservatives are looking for a significant boost to escape what opinion polls suggest will be a landslide defeat to the opposition Labour Party.

Sunak has said he wants to hold the election, due by end-January at the latest, when people “feel that things are improving.” Hunt said in a Bloomberg TV interview that the “feel-good factor as interest rates start to come down, as people start to feel higher real disposable incomes,” will be stronger come the autumn.

But Bloomberg Economics says the BOE cutting interest rates could translate into a net loss for households. For the 1 million due to refinance fixed-rate mortgages by end of the year, new loans will be pricier than the ones they are currently on. And savers — whose huge cash piles benefitted when rates were rising — will see their incomes fall.

“Lower interest rates could well weigh on households’ income in the early stages of the easing cycle,” Hanson said. “That casts doubt over whether the boost Hunt has alluded to will materialize before the election.”

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