(Bloomberg) -- Bank of England policymakers appear the most divided since they brought their hiking cycle to a close last year, illustrating the challenge that Governor Andrew Bailey faces in steering his colleagues toward possible interest-rate cuts in the coming weeks.

Bailey, who assumed his post days before the UK’s first Covid lockdown, has been carried along by series of crises that left the benchmark lending rate at a 16-year high and pushed public confidence in the UK central bank to an all-time low. 

Now he’s under pressure from the ruling Conservative Party to deliver lower borrowing costs — the “feel-good factor” as Chancellor of the Exchequer Jeremy Hunt put it — ahead of a general election expected later this year.

The governor, who is 65 and half-way through an eight-year term, has sounded increasingly open to easing in recent weeks. However, other officials on the legally independent central bank, including Bailey’s own chief economist, have voiced a reluctance to move until there are clearer signs that underlying inflationary pressures are subdued. The result has left investors and economists guessing about the guidance Bailey will convey when the BOE’s nine-member Monetary Policy Committee announces its next rates decision a week from Thursday.

“We’re seeing new divides emerge, with MPC members who tend to be towards the center of the debate shifting their views,” said Modupe Adegbembo, economist at Jefferies. “We take the divergence in views as confirming our expectations of a gradual cutting cycle.”

As of Wednesday, investors were pricing in the BOE waiting until September to make it’s first quarter-percentage-point rate cut, with UK rate bets heavily influenced by the shifts in US markets. Some economists, however, continue to forecast cuts as soon as June. While the MPC is widely expected to leave rates unchanged at 5.25% at its meeting next week, it could give clues about whether a June reduction is in play.

For Prime Minister Rishi Sunak rate cuts can’t come soon enough as he tries to fend off Keir Starmer’s resurgent Labour Party. The government faces a test in elections for local authorities on Thursday and must seek a new mandate no later than January 2025. Sunak listed the prospect of declining interest rates at a news conference last week as evidence his economic plan was working.

What Bloomberg Economics Says ...

“With inflation set to fall close to 2% imminently, we think the policy decision could well see more votes for a cut. New forecasts are also likely to indicate the central bank is minded to ease by more than markets expect this year. Our base case is that the first move down will be in June.”

—Dan Hanson, Bloomberg Economics.

With the European Central Bank signaling an openness to loosening and the US Federal Reserve reiterating on Wednesday that its own rates may need to remain higher for longer, BOE officials are sending mixed messages about their views. Bailey, for his own part, has suggested that he thinks the UK’s path more closely resembles Europe’s, pointing to “strong evidence” of progress on inflation. 

Central bank officials expect inflation, which peaked at over 11%, to slide back to the 2% target this quarter but will provide new forecasts next week showing whether it will stick there.

That’s left markets highly sensitive to the words coming from BOE policymakers at a moment when the message has become more foggy. The uncertainty partly reflects stronger-than-expected inflation readings both in the US and UK and also differing judgments about how much upward pressure strong wage growth will put on prices.

Investors, who at the start of the year were betting on six quarter-point cuts this year, now have only fully priced in one. Bailey opened the door to rate cuts in February and suggested he’s relatively relaxed about the outlook for inflation. But there are signs the rest of the committee isn’t ready.

Chief Economist Huw Pill set the tone for the BOE’s outlook starting in August during a visit to Cape Town, where he warned that rates may follow a “Table Mountain” path, staying higher for longer than many people had hoped. More recently, he’s said rate cuts are “somewhat closer,” but also that there’s still a “reasonable way to go” before he’s convinced that underlying price pressures have been reined in.

“Pill has not followed Governor Bailey’s dovish lead,” said Elizabeth Martins, UK economist at HSBC. “That might suggest the internal MPC members are not quite all on the same page.”

The pressure is ratcheting up from impatient Conservative MPs, who are eager for a rate-cutting cycle to begin before a general election, easing the squeeze on voters’ finances. Chancellor of the Exchequer Jeremy Hunt has repeatedly raised the prospect of the BOE reducing rates, saying cuts would give voters a “feel-good factor.”

Market bets on the BOE holding off looser policy have already led to mortgage rates creeping higher again and house prices cooling, threatening to puncture Hunt and Sunak’s narrative that the economy is turning the corner after last year’s mild recession. The OECD warned in its latest forecasts published Thursday that the UK will be the slowest growing advanced economy in 2025, partially due to expectations that the BOE will keep rates elevated.

The stakes for Bailey are also high. Moving too late risks facing more interference from Westminster at a moment when the BOE is trying to restore its credibility after double-digit inflation and former Fed Chair Ben Bernanke’s stinging criticisms of the UK central bank’s forecasting and communications.

However, a pivot too early threatens to leave the job on inflation undercooked, as a tight labor market fuels wage growth and services inflation.

To tee up a move in June, the MPC may need to tweak its guidance to investors next week, shifting from a vow to “keep under review for how long Bank Rate should be maintained” and further toward a firmer hint at imminent cuts.

However, Bailey’s recent comments have not set the weather on markets in the same way Fed Chair Jerome Powell has done in recent months. Powell on Wednesday warned it will take the Fed longer to gain confidence that inflation is coming down sustainably, allowing it to cut rates.

Instead, there’s more focus in the UK on individual members of the MPC.

The hawk camp includes Catherine Mann, Jonathan Haskel and Megan Greene, each of whom have drawn attention to lingering inflationary pressures and a tight labor market. Bailey and Deputy Governor Dave Ramsden have sounded more dovish, noting the drop in inflation leaves the UK as less of an international outlier and closer to the inflation dynamics in the eurozone. 

That may leave Pill as a key swing vote, and economists have been divided on how they read his latest words. Some say the chief economists is consistent with Bailey and Ramsden, while others think Pill sounds more like the hawks.

“Huw would rather not cut in May, but wants people to think that if the MPC do not cut soon it is because they are being tough on inflation rather than simply following the Fed,” said Michael Saunders, senior adviser at Oxford Economics and former BOE rate-setter. 

Martin Weale, a professor of economics at King’s College London and another former MPC member, said Pill and Ramsden’s speeches are “the difference between a half empty glass and a half full glass.” 

A new round of forecasts from the BOE this month could also be an opportunity to show a leaning toward rate reductions. 

“Bailey and Deputy Governor Ramsden sound like they are close to being ready, and judging by the tone of the March minutes, we suspect at least some of the rest of the internal members are with them,” said Martins. “If the MPC wants to leave the door open for a June cut – and we think it will – it will need to signal it in May.”

--With assistance from Philip Aldrick, James Hirai and Andrew Atkinson.

(Adds Fed decision, OECD forecasts)

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