The Bank of England will cut interest rates only once this year, in November, according to a majority of economists polled by Reuters, and British inflation is expected to remain above target.
At the August meeting, the Monetary Policy Committee cut the bank rate to 5.00% from 5.25%, the highest level in 16 years, by a narrow vote of 5 to 4. Governor Andrew Bailey, however, insisted that reductions were “wise ” on borrowing costs. going forward.
The BoE is expected to move slowly compared to its peers, the US Federal Reserve and the European Central Bank, both of which are expected to cut rates by a total of 75 basis points this year. The ECB started in June and the Fed is expected to start next month.
One of the first major central banks to start raising borrowing costs after the pandemic, the BoE raised its bank rate by 515 basis points between December 2021 and August 2023, to target inflation that peaked at 11.1% in October 2022 combat, the highest level. in 41 years.
Inflation fell below the central bank’s 2% target in May and June, but rose to 2.2% in July and is not expected to fall below target again anytime soon. The BoE expects inflation to reach 2.75% by the end of the year.
“Overall inflation is expected to reach 2.75% to 3.00% by the end of the year, and unemployment may rise… CPI and survey data show that inflation is under “The underlying market is indeed falling, but at a snail’s pace,” said Rabobank’s Stefan Koopman.
“So, the data should give the hawks on the monetary policy committee enough ammunition to argue for a careful and gradual adjustment.
Of the 60 economists who took part in a Reuters survey, all but three expected the BoE to keep its discount rate at 5.00% on 19 September. Three of them expected a decrease of 25 basis points.
Median forecasts show the BoE will cut the bank rate again this year, to 4.75% in November, the date of the central bank’s next set of quarterly economic forecasts.
However, markets are pricing in two more rate cuts, in November and December, with an interest rate of 4.50% at the end of the year.
A 65% majority of economists, 39 out of 60, expect the BoE to cut rates only once this year, leaving borrowing costs at 4.75%. Twenty economists predict two or more cuts and one economist predicts no cuts.
Average forecasts show that the bank rate will be at 4.50% at the end of March, 4.25% at the end of June and that a final cut in 2025 to 3.75% will have taken place during the third trimester.
Of the 14 gilt market makers (GEMMs) that participated in the survey, 12 predicted a quarter point cut in November this year, and two predicted a 50 basis point cut during the next quarter.
Among GEMMs, Citigroup and TD Securities raised their year-end forecasts from 4.50% to 4.75% in a July survey.
SERVICE AND WAGE INFLATION STILL HIGH
Despite a clear slowdown in July, inflation in services and wages remains high. Wage inflation was 5.4% in the three months to June, compared with a year earlier, the lowest rate for almost two years, but still almost double the rate the BoE considers in line with its CPI target of 2% keep
“If wage growth is steadier, if it doesn’t slow down as quickly as we thought, services inflation is likely to be pushed up because labor costs are the most important for service providers,” said Ellie Henderson, economist at Investec.
Inflation is expected to average between 2.2% and 2.5% in the third and fourth quarters, respectively, and to remain at this level until at least the end of 2025.
When asked which of their inflation forecasts was most likely in the services sector, respondents were divided. Of the 18 participants, 10 answered that it would be higher than expected, and eight answered that it would be lower.
Average forecasts call for inflation to average 2.6% this year and 2.3% next year.
The British economy grew by 0.6% in the second quarter and 0.7% in the first quarter, the fastest pace in more than two years. The poll predicts quarterly gross domestic product growth of 0.3% on average by the end of 2025.
GDP is expected to grow 1.1% this year, higher than the 0.8% forecast in the July poll, 1.3% the following year and 1.4% in 2026.
(from a Reuters poll on the world economy)