June 12 2024: According to a Reuters poll of 65 economists, the Bank of England (BoE) is set to start cutting interest rates in August, with most experts anticipating at least one more rate reduction this year, despite persistent wage and services inflation.
The BoE, one of the first central banks to raise rates after the COVID-19 pandemic, increased the Bank Rate by 515 basis points between December 2021 and August 2023, reaching a 16-year high of 5.25% to combat surging price pressures in the economy.
Overall inflation fell to 2.3% in April, nearing the central bank’s 2.0% target, down from a peak of 11.1% in October 2022. The job market has shown signs of slowing, and official statistics on Wednesday revealed that the economy stalled in April, partly due to unusually rainy weather.
However, wage and services inflation, which are closely monitored by the BoE, remain around 6%.
Only two of the 65 economists polled expected the BoE to delay rate cuts until September. All 24 economists who participated in both the latest and the previous month’s poll, and who had previously forecast a cut in June, have now moved their predictions to August.
Financial markets are currently pricing in only one BoE rate cut this year, expected in September.
“While we are seeing some tentative signs of cooling in the labour market, service sector inflation remains persistently high. It is likely the Monetary Policy Committee (MPC) would want to wait until the next set of forecasts and a few more data points before it embarks on its first rate cut,” said Yael Selfin, chief UK economist at KPMG.
One set of labor market data and two more inflation releases are due before the MPC meets in August, when it next releases detailed quarterly forecasts.
When asked if any other MPC members would vote for a rate cut in June, as Dave Ramsden and Swati Dhingra did in May, about three-quarters (22 of 30) economists responded “No.” The remaining eight said “Yes.”
The poll’s median forecast showed the Bank Rate would be a half-point lower by year-end. It was projected at 5.00% at the end of September and 4.75% by the end of the year, compared to 4.75% and 4.50%, respectively, in last month’s poll.
Just over half of the economists (35 of 65) forecast two 25-basis-point rate reductions to 4.75% by the end of 2024. Over one-third (24 of 65) predicted 75 basis points of cuts to 4.50%, with three economists expecting the rate to drop further to 4.25%. The remaining three anticipated only one cut this year to 5.00%.
This prediction aligns with expectations for two quarter-point cuts by the U.S. Federal Reserve this year. The Fed will announce its latest policy decision later on Wednesday, but is not expected to cut rates until September at the earliest.
The European Central Bank began its rate-cutting cycle on June 6 but is not expected to follow up with a second cut soon.
UK inflation is predicted to average slightly above the BoE’s target of 2.0% through at least the end of 2025, according to the poll. Median forecasts indicated inflation would average 2.5% this year and 2.2% next year. The economy is expected to grow by 0.3% each quarter until the end of 2025, unchanged from last month’s poll.
For 2024, the economy is forecast to expand by 0.7%, faster than last month’s prediction of 0.5%. Growth is expected to accelerate to 1.2% and 1.4% in the following two years, respectively.
