The Bank of England is highly unlikely to begin reducing interest rates until at least the second half of this year, according to industry commentators, with some projecting cuts totalling just 50 basis points by the end of 2024.
The comments come ahead of the Bank of England’s Monetary Policy Committee meeting tomorrow (9 May), when its nine members will decide whether to hold, hike or reduce interest rates based on economic data. At the last meeting on 5 March, eight out of nine members voted to hold rates at 5.25% for the fifth consecutive month.
Last week, the US Federal Reserve decided to hold rates at a range of between 5% and 5.25%, where it has remained since July 2023. The Fed reiterated its 2% inflation target remains in place, despite data surprising stubbornly to the upside over recent months.
The picture is not dissimilar in the UK – albeit at a lesser scale. While headline inflation is falling, Karen Ward, chief market strategist for EMEA at JP Morgan Asset Management, warned medium-term domestic inflation indicators “remain significantly above the Bank of England’s 2% target”.
“If the economy were slowing, I’d expect core inflation to follow suit, but that’s not what’s happening here,” she said.
“With real wages returning to positive growth, the economy appears to be gaining momentum. That means the current dip in inflation we’re seeing is likely temporary, with a possible resurgence on the cards for the second half of the year.”
She added that by “late summer”, the Bank “may have more evidence of easing underlying pressures”.
“However, for now, I think it should communicate that its target is medium term and, just as it looked through 10% headline inflation, it should also look through a short-term dip in inflation.”
Peter Goves, head of developed market debt sovereign research at MFS Investment Management, also expects no change in policy ahead of the MPC’s meeting tomorrow, with the view that the BoE “requires more confidence” that inflation will fall sustainably.
He said: “Since the last meeting, data has broadly come in line with BoE expectations. For example, inflation over Q1 was 3.5% versus the BoE’s 3.6% projection. The labour market is cooling and [Governor] Bailey has stressed that the UK appears to be disinflating around full employment.
“And yet, largely on imported hawkishness from the US, yields are higher and fewer than two cuts are now priced for 2024.”
Goves therefore has “high conviction” that cuts will come during the second half of this year, with two cuts broadly expected. “We suspect the MPC will judge the current yield path is too high, effectively signalling (more) cuts are likely, probably around Q3 in our view.
Shaan Raithatha, senior economist at Vanguard, agrees with Ward that economic developments over the past month for the UK have been “mixed”. While measures of inflation persistence have “firmed slightly”, he said recent talks from the BoE have seemed dovish.
“Key MPC members do not appear overly concerned about the modest pick-up in measures of inflation persistence,” he reasoned. “For example, Governor Bailey in comments made in Washington pointed to “strong evidence” that the process to reduce inflation “is working its way through” with inflation “pretty much on track” to decline in line with the February projections. And Deputy Governor Ramsden stated on 19 April that he’s become “more confident in the evidence that risks to persistence in domestic inflation pressures are receding”.”
Overall, Raithatha views the UK outlook as “slightly more hawkish” than it did six weeks ago, with Vanguard having upgraded its 2024 GDP growth forecast by 20 basis points to 0.5%.
“We still expect the first rate cut in August. However, a more hawkish Fed and ECB, renewed growth and still sticky services inflation have led us to dial down our expectations for the pace of easing thereafter. We now expect a total of 50 basis points of cuts by year-end and 100 basis points of cuts in 2025.”
