By Jonathan Cable
LONDON (Reuters) – The Bank of England will cut its benchmark interest rate to 5% next week, a majority of economists said in a Reuters poll. With inflation expected to fluctuate around the target, it will adopt a slow and steady course of reductions and make another cut this year.
However, the markets are only calculating a 45 percent probability of a rate cut and several economists declined to comment on whether the first rate cut would take place in August or September.
The benchmark interest rate has been at a 16-year high of 5.25% since last August. The BoE was one of the first central banks to start raising borrowing costs after the COVID-19 pandemic and is now considering easing policy, like its peers.
More than 80 percent of economists (49 out of 60) in the July 18-24 survey said the bank would cut rates to 5 percent on August 1. However, a similar sample of respondents in a June survey were more likely to believe a rate cut would occur next week: 97 percent predicted it would happen that day.
The bank will publish its quarterly monetary policy report together with the interest rate announcement next week and hold a press conference.
“We expect a 25 basis point rate cut at next week’s meeting, although this seems much closer than it did a few weeks ago. The case for lower rates is far from clear,” noted Allan Monks of JP Morgan.
“If interest rates are cut in August, it is likely to happen by a narrow margin of 5 to 4.”
In June, the interest rate-setting Monetary Policy Committee voted 7-2 to leave the benchmark interest rate unchanged, but some members said their thinking was now “balanced.”
A rate cut in August would put the BoE ahead of the US Federal Reserve, which is expected to wait until September, but behind the European Central Bank, which made its first rate cut in June and, although it paused this month, said September was “completely open”.
UK inflation came in at 2% in June – the Bank’s target – but fell short of forecasts of a slight decline. Although wages rose slightly more slowly, they still rose at a pace that would normally be too strong for the Bank to handle, and markets reduced bets on a move in August.
In the three months to May, wages rose by 5.7 percent year-on-year, almost twice as much as would be consistent with the BoE’s inflation target of two percent.
Nevertheless, inflation was expected to remain relatively moderate and close to target until 2025.
BREATHING PAUSE
After the August cut, the bank will pause in September before cutting the key interest rate by 25 basis points in November, setting it at 4.75%, median forecasts showed. It will take another breather in December.
When asked what was more likely regarding their forecasts for the end of 2024, 77% of respondents (or 17 out of 22) answered a follow-up question that the key interest rate would be higher than expected.
Next year will see a similar slow and steady pace, with cuts of 25 basis points in the first and second quarters, 50 in the third and 25 in the fourth, to bring the policy rate down to 3.50% by the end of 2025.
“A rate cut of 25 basis points is basically a quarter. A very gradual trend towards the point where we suspect the end point and the neutral interest rate, which is just under 3 percent,” said Sanjay Raja of Deutsche Bank.
“We will reach that point in the summer of 2026. So it is a very long cycle of interest rate cuts towards a neutral policy.”
The growth path will also be stable – forecasts suggest that the economy will grow by 0.3 percent each quarter until the end of 2025.
GDP growth will increase by 0.8 percent this year before picking up to 1.3 percent next year, slightly stronger than expected in June.
(More articles from Reuters’ global economic survey)
(Reporting by Jonathan Cable; additional reporting by Hari Kishan; polling by Sarupya Ganguly; editing by Bernadette Baum)
