Rates set to come down further by year-end despite Bank caution, say experts
Many economists believe rates will be held in September, but will fall again in November.
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The Bank of England was quick to downplay the prospect of a flurry of rate cuts after its first reduction for more than four years, but experts said borrowing costs will likely come down further this year.
The cut from 5.25% to 5% was a very close decision, with a majority of just five of the nine members of the Monetary Policy Committee (MPC) voting for a reduction.
It also saw the Bank move ahead of its counterparts at the US Federal Reserve, which late yesterday voted to hold rates once again.
Economists said given the Bank’s cautious statement and the close vote, they are not expecting back-to-back cuts through the remainder of the year.
We think better news on services inflation and wage growth can unlock one, or more likely two rate cuts by year-end
A no-change decision is now pencilled in for September, but many believe the next cut could come in November.
Peter Arnold, EY’s UK chief economist, said: “Given this month’s decision was such a close call for some of those who voted to cut, the EY Item Club doesn’t expect a repeat in September.
“The EY Item Club expects the next cut to come in November, leaving Bank Rate at 4.75% at the end of 2024.”
James Smith, developed market economist at ING, believes there may be room for even more cuts by the year-end.
He said: “The Bank of England is staying tight-lipped on when it expects to cut rates again.
“But we think better news on services inflation and wage growth can unlock one, or more likely two rate cuts by year-end.”
The Bank’s latest set of quarterly forecasts shows that based on interest rate expectations among financial markets, the Consumer Prices Index inflation could drop below its target, to as low as 1.7% in the next two years or 1.5% in three years’ time.
This suggests that the Bank will need to cut rates at a faster pace than markets predicted at the time of its forecasts.
Mr Smith said the Bank will also likely “ultimately cut rates faster than the committee is currently prepared to admit”.
He added: “We suspect the data on services inflation and wage growth will improve as the year goes on, making the committee more comfortable with proceeding with at least one more cut this year.
“We suspect that will most likely come in November, and we think that will most likely be followed by another in December.”
He is forecasting that rates could fall to 3.5% or even 3% by next summer.
Rob Wood, at Pantheon Macroeconomics, believes rates will fall again in November and then in February next year, but will drop more slowly thereafter, given the Bank’s own forecast for inflation to rise back up to 2.75% by the end of 2024.
He said: “We continue to expect the MPC to pause rate cuts between February and August next year after inflation rises this winter and wage and services price rises prove more stubborn than the MPC expects.
“All told we expect Bank Rate at 4.75% at the end of 2024 and 4.0% at the end of 2025.”