MNI INTERVIEW: Budget Shouldn't Prompt BOE Cuts-OBR's Miles

The Bank of England is unlikely to deviate from expected rate paths by making deeper cuts than otherwise in response to disinflationary measures in the Nov 26 budget, Office for Budget Responsibility Chief Economist David Miles told MNI.

"I think [the disinflationary measures are] not of a magnitude that most people would think that the Bank is now just going to change strategy and start cutting rates much more aggressively, and it is to a significant extent, temporary," Miles said in an interview.

Measures including a reduction to levies on household energy bills led the OBR to increase its CPI forecast by less than it otherwise would have, with inflation seen reaching 2.5% in 2026 and the 2% target in 2027. 

"It's not as if inflation is suddenly going to come down and dip beneath the 2% target," Miles said, though he added that the decrease in inflation resulting from the measures is "not trivial.”

The BOE’s Monetary Policy Committee has disagreed over the persistence of inflation and its impact on inflation expectations, with some analysts having predicted the budget measures would affect the likelihood of a rate cut in December.

"We felt that we could use the market expectations, the profile of Bank Rate, as it was before the budget in the second half of October," Miles said, noting that BOE Chief Economist Huw Pill had indicated that budget measures with only a temporary effect would be better looked through.

"In a sense, by having a central forecast where inflation gets to 2% a couple of years from now and stays there, one is implicitly showing a profile which reflects muted inflation expectations already,” Miles said.

An alternative scenario to market expectations, in which inflation expectations fall more rapidly and the Bank is comfortable cutting more substantially than expected, was not considered plausible by the OBR, he said.

The OBR predicted average weekly earnings growth would fall from 3.3% in 2026 to 2.3% in 2027.

"If you look at the nominal wage settlements that we've got, they're stronger this year. That's baked in. Expectations of settlements into next year are reflecting on what perhaps is likely to happen,” Miles said.

QUANTITATIVE TIGHTENING

The OBR assumed the Bank would reduce its stock of gilts by GBP70 billion from October 2025 to September 2025, then keep a constant pace of active sales of GBP32 billion a year for the rest of the duration of the forecast, although the Bank has not committed to any specific path.

"The Bank can't say that 'this is what we're going to do' because it's ultimately a decision of the Monetary Policy Committee," Miles said.

"In a fiscal sense, I think you could say with some plausibility that it doesn't make an awful lot of difference whether you run down the stock of gilts that the Bank holds merely by running off by maturity, or accelerating a bit or not accelerating a bit." 

The maths "behind that view is if you sell off more quickly, you take the loss explicitly up front,” he said."If you don't sell off, you just face a longer period where the interest rate you're paying on the reserves is above running coupon income from the bonds. So you have a longer period of smaller losses versus [getting] it over with upfront."

TAX SMORGASBORD

Some had advised Reeves to adopt fewer, larger tax rises instead of a "smorgasbord" of smaller revenue raising measures in the budget. However, Miles disagreed that this would be a better strategy in principle. (See MNI INTERVIEW: UK Fiscal Gap Needs Simple Tax Hikes - King)

"I'm not so sure about this thing where one big thing would be less uncertain than 10 small things," he said. "In statistics, if you take 10 things which are individually quite risky, but the risks around them are uncorrelated, and you put 10 of them together, you get less volatility."

However, he acknowledged that some of the new measures, such as the electric vehicle mandate, will have more uncertain behavioural impacts. "It's difficult to know quite ... what that does to demand for electric vehicles and how much people are going to drive."