Rate cuts still likely in 2024 as economy feels hit from past hikes, say experts
Economists say the Bank will struggle to hold off from lowering interest rates next year in the face of a flatlining economy.
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Your support makes all the difference.The Bank of England has dashed hopes of a cut to interest rates any time soon, but experts said they still believe lower borrowing costs are on the cards next year as the economy falters.
Bank governor Andrew Bailey said cuts were not even under consideration in the Monetary Policy Committee’s latest meeting, stressing that rates will need to remain higher for longer – and may even need to rise further if inflation fails to come back to target.
The latest forecasts in the Bank’s Monetary Policy Report show the economy is slowing after the recent near two-year run of rate hikes, with the economy skirting with a recession next year as the Bank downgraded its forecast to zero growth in 2024.
It will be increasingly hard for the MPC to justify keeping rate cuts off the agenda
Samuel Tombs, from Pantheon Macroeconomics, said he still expects the Bank to cut rates next year, with signs that the jobs market is already cooling “considerably”.
He said: “We are sticking with our forecast that the MPC (Monetary Policy Committee) will reduce Bank Rate by 75 basis points next year, with the first 25-basis-point-cut coming in May.
“Guidance based on the MPC’s forecasts – which committee members have admitted are less meaningful than usual and which are under review due to recent large errors – shouldn’t count for much.
“The MPC is currently reactive and backward-looking, and its stance will shift, potentially quickly, as the economic data change.”
Mr Tombs added that even if the Bank does cut rates modestly in 2024, monetary policy would still be effectively tightening as homeowners come off fixed deals and have to refinance at higher interest rates.
ING’s economist James Smith said the Bank appeared keen to push back against financial market expectations for two rate cuts in 2024.
He said: “As has been clear since the start of the summer, this is a central bank whose overriding goal now is to convince investors that it won’t need to cut rates for a significant period of time.
“However, we believe markets are right to be thinking about rate cuts from next summer.
“As the Bank itself acknowledges, much of the impact of past tightening is still to hit the economy.”
With inflation set to ease back sharply next year, Mr Smith said “we’re forecasting a gradual easing cycle that takes Bank Rate back to just above 3% by the middle of 2025”.
Martin Beck, EY Item Club’s chief economic adviser, said “it will be increasingly hard for the MPC to justify keeping rate cuts off the agenda”.
He is predicting the first rate cut in May next year, which would be the first for four years at that point, as inflation falls rapidly and the economy flatlines in 2024.
Mr Beck said: “The economy appears to be increasingly feeling the impact of the past rises in interest rates, with, at best, a period of stagnation likely over the next few quarters.
“On that note, the Bank of England’s latest estimate is that half of the impact of higher interest rates on the level of GDP is still to come through.”