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To cut, or not to cut, that is the question

The Monetary Policy Committee’s decision on whether to cut rates in January rests on a knife edge and could go either way. The MPC must weigh up the weakness of the economy and low inflation in Q4 with the prospect that the election result, a Brexit Withdrawal Agreement and a probable fiscal stimulus in the Budget in March will give GDP growth and inflation a boost later this year, negating the need for lower rates now. The market has swung from ignoring the chances of a 25bps rate cut in January or March at the start of the year to heavily betting that there will be one now. (See Chart 1.) But our hunch is that if there is a jump in the January PMIs as we expect, then rates will remain on hold at 0.75%.

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