Bank of England to cut interest rates again this year, economists say: Reuters poll | WTAQ News Talk | 97.5 FM · 1360 AM

By Shaloo Shrivastava

BENGALURU (Reuters) – The Bank of England will cut its benchmark interest rate only once this year, in November, a majority of economists said in a Reuters poll, as British inflation is expected to remain above target.

At the August meeting, the Monetary Policy Committee cut the benchmark interest rate from a 16-year high of 5.25% to 5.00% in a narrow 5-4 vote. However, Governor Andrew Bailey stressed that borrowing costs should be reduced “cautiously” going forward.

The BoE is likely to move more slowly than the US Federal Reserve and the European Central Bank, both of which will 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.

The BoE was one of the first major central banks to raise borrowing costs after the pandemic, raising the key interest rate by 515 basis points between December 2021 and August 2023 to combat inflation, which hit a 41-year high of 11.1% in October 2022.

Inflation fell to the central bank's target of 2% in May and June, but rose to 2.2% in July and is unlikely to fall below the target any time soon. The BoE forecast inflation rising to 2.75% by the end of the year.

“We see the inflation rate slowly approaching the 2.75-3.00 percent mark by the end of the year and unemployment could stabilize. The consumer price index and survey data show that underlying inflation is indeed declining, but at a snail's pace,” said Stefan Koopman of Rabobank.

“Consequently, the data should provide MPC hawks with sufficient ammunition to advocate for cautious and gradual adjustment.”

Of the 60 economists who responded to the Reuters poll, all but three expected the BoE to keep interest rates at 5.00% on September 19. Three expected a 25 basis point cut.

According to median forecasts, the BoE will cut interest rates again this year, to 4.75% in November, when the central bank's next round of quarterly economic forecasts is due.

However, the markets are factoring in two further interest rate cuts in November and December, with the interest rate at the end of the year being 4.50%.

A majority of 65 percent of economists (39 out of 60) expect the BoE to cut interest rates only once this year, leaving borrowing costs at 4.75 percent. Twenty of them expected two or more cuts, while one said none at all.

The median forecasts assumed a key interest rate of 4.50% at the end of March, 4.25% at the end of June and a final cut to 3.75% in the third quarter of 2025.

Of the 14 Gilt-edged Market Makers (GEMMs) who responded to the survey, 12 forecast a quarter-point cut in November this year, while two predicted a 50 basis point cut in the next quarter.

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

SERVICES, WAGE INFLATION STILL HIGH

Despite a significant slowdown in July, services and wage inflation remain high. In the three months to June, wage inflation was 5.4% year-on-year, the lowest in almost two years. But it is still almost double the rate the BoE considers consistent with the consumer price index, which remains at its 2% target.

“If wage growth remains sustained and does not slow as quickly as expected, then there is likely to be upward pressure on services inflation as labour costs are the biggest cost driver for services providers,” said Ellie Henderson, economist at Investec.

Inflation is forecast to average 2.2% and 2.5% in the third and fourth quarters, respectively, and remain at that level at least until the end of 2025.

When asked which inflation forecast for the services sector was more likely, respondents were divided. Of 18 participants, 10 said it would be higher than expected, while 8 said it would be lower.

The median forecasts assumed average inflation of 2.6% this year and 2.3% next year.

The UK economy grew by 0.6% in the second quarter and 0.7% in the first quarter, the strongest growth in more than two years. The survey forecast quarterly gross domestic product growth averaging 0.3% until the end of 2025.

GDP growth was forecast to be 1.1 percent this year, higher than the 0.8 percent expected in the July survey. GDP is expected to grow by 1.3 percent next year and 1.4 percent in 2026.

(from Reuters global economic survey)

(Reporting by Shaloo Shrivastava; polling and analysis by Mumal Rathore and Jaiganesh Mahesh; editing by Ross Finley and Toby Chopra)