The Bank of England (BoE) is expected to start reducing interest rates in August, according to a slight majority of economists surveyed by Reuters.
A marginally smaller group anticipated a rate cut next month. BoE Governor Andrew Bailey noted after last week’s policy meeting that while more evidence was needed to ensure inflation remains low, he is optimistic about the trend and did not dismiss the possibility of a June cut.
Since late 2021, the BoE has increased the Bank Rate by 515 basis points to a 16-year high of 5.25% to combat inflation, which peaked at 11.1% in October 2022.
Inflation has since decreased to 3.2% in March and is expected to average around the BoE’s 2% target from this quarter until at least the end of 2025, potentially providing the BoE with some flexibility.
However, services inflation, a key indicator of domestic price pressures for the BoE, remained high at 6.0% in March.
Two inflation reports and one set of labor market data are expected before the June 20 policy meeting.
In the May 13-16 poll, slightly over half of the economists, 38 out of 71, predicted the first rate cut to 5.00% would occur in August.
Thirty-one chose June, a slightly smaller proportion than in the April poll, while two forecasted September.
Dean Turner, chief euro zone and UK economist at UBS Global Wealth Management, commented, “The reason I’m currently leaning a little bit more towards August rather than June is that with signs the economy is doing OK, the BoE is unlikely to feel the need to rush into cutting interest rates.
They have time to ensure further progress on services inflation and wage pressures.”
Among gilt-edged market makers (GEMMs), opinions were almost evenly divided on the timing of the first cut, with eight predicting June and seven August. Financial markets anticipate two rate cuts this year, beginning in June.
Of the 16 economists who forecasted an August cut and answered an additional question on the risk, all but one said the first reduction was more likely to come earlier rather than later.
An August policy change would align the BoE with its major peers, slightly later than the European Central Bank’s anticipated June move but ahead of the U.S. Federal Reserve’s expected September action.
“We’re looking for a couple of cuts this year just to bring rates down from currently restrictive levels and making it a little bit less restrictive,” said Jennifer Lee, senior economist at BMO Capital Markets.
The Bank Rate is projected to be 4.75% by the end of Q3 and 4.50% by the end of Q4, unchanged from last month’s poll.
Inflation is predicted to average 1.9% this quarter and 2.0% next, rising slightly in Q4 and staying around that level until at least the end of 2025. Median forecasts indicate inflation averaging 2.4% this year and 2.2% next.
Regarding the risk of a resurgence of UK inflation over the next three months, 82% of respondents, or 28 of 34, believed it was low.
The economy, which exited a brief recession last quarter with 0.6% growth, is expected to slow to 0.3% growth each quarter until the end of 2025.
Economic growth is forecast to be 0.5% across 2024, slightly higher than last month’s 0.4% prediction, and is expected to accelerate to 1.2% in 2025 and 1.4% in 2026.