Bank of England to deliver one more rate cut this year, economists say: Reuters poll

08/21/2024

3 minutes read

2024.08.21 09:51

By Shaloo Shrivastava

BENGALURU (Reuters) – The Bank of England will cut interest rates just once more this year, in November, a majority of economists said in a Reuters poll, as British inflation is expected to stay above target.

At the August meeting, the Monetary Policy Committee trimmed Bank Rate to 5.00% from a 16-year high of 5.25%, in a tight 5-4 vote. However, Governor Andrew Bailey emphasized “careful” reductions in borrowing costs going forward.

The BoE is expected to go slow compared with peers the U.S. Federal Reserve and the European Central Bank, which are both forecast to cut rates by a total of 75 basis points this year. The ECB started in June and the Fed is due to start next month.

One of the first major central banks to start raising borrowing costs after the pandemic, the BoE raised Bank Rate by 515 basis points between December 2021 and August 2023, to tackle inflation that peaked at a 41-year high of 11.1% in October 2022.

Inflation fell to the central bank’s 2% target in May and June but rose to 2.2% in July and is not expected to recede below target anytime soon. The BoE projected inflation to rise to 2.75% by year-end.

“We’re witnessing headline inflation inching towards 2.75%-3.00% by year-end, and unemployment may steady… CPI and survey data shows underlying inflation is indeed receding, but at a snail’s pace,” said Stefan Koopman at Rabobank.

“Consequently, the data should arm the MPC hawks with enough ammunition to advocate for a cautious and gradual adjustment.”

All but three of 60 economists who participated in the Reuters survey expected the BoE to hold Bank Rate at 5.00% on September 19. Three expected a 25 basis point cut.

Median forecasts showed the BoE would lower Bank Rate once more this year, to 4.75% in November when the next round of quarterly economic forecasting from the central bank is due.

However, markets are pricing two more rate cuts, in November and December, with the end-year interest rate at 4.50%.

A majority 65% of economists, 39 of 60, forecast the BoE to only cut rates once more this year, leaving borrowing costs at 4.75%. Twenty saw two or more reductions and one said none.

Median forecasts showed Bank Rate at 4.50% at end-March, 4.25% at end-June and a final 2025 cut to 3.75% in the third quarter.

Of 14 Gilt-edged market makers (GEMMs) who participated in the survey, 12 predicted one quarter-point cut in November this year, while two predicted 50 basis points of cuts next quarter.

Among GEMMs, Citigroup and TD Securities raised their year-end forecasts to 4.75% from 4.50% in a poll taken in July.

SERVICES, WAGE INFLATION STILL HIGH

Despite easing sharply in July, services and wage inflation are still high. Wage inflation was 5.4% in the three months to June from a year ago, its lowest in nearly two years, but still nearly double the rate the BoE sees as consistent with CPI staying at its 2% target.

“If wage growth turns out to be more persistent, it doesn’t ease as quickly as we thought, then there’s likely to be upside pressure to service inflation as labour costs are the biggest cost for service providers,” said Ellie Henderson, economist at Investec.

Inflation was predicted to average at 2.2% and 2.5% in Q3 and Q4, respectively, and stay around there until at least end-2025.

Asked what is more likely for their services inflation forecast, respondents were split. Of 18 participants, 10 said it will be higher than they expect while eight said lower.

Median forecasts showed inflation averaging 2.6% this year and 2.3% next.

The UK economy expanded 0.6% in Q2 and 0.7% in Q1, the fastest pace in more than two years. The poll predicted quarterly gross domestic product growth to average 0.3% through to the end of 2025.