The Bank of England is expected to hold interest rates at 4.75% on Thursday, despite signs the economy is slowing, as persistent inflationary pressures limit it to a “gradual” approach to reducing borrowing costs .
All 71 economists polled by Reuters said rates would remain unchanged for now. Most of them expect a drop of just a quarter point on February 6 after the next meeting, followed by three more cuts by the end of 2025.
Financial markets are much less certain about the size of rate cuts next year, following data on Tuesday that showed an unexpected acceleration in wage growth. Late Wednesday, investors estimated a 50% chance of a rate cut in February and just two cuts for all of 2025.
On the other hand, the European Central Bank reduced its rates by one percentage point in 2024 and the markets expect it to lower them by another percentage point in 2025, while the economy of the zone euro is affected by political unrest and the risk of a trade war with the United States.
The divergence in interest rate outlooks has pushed the spread between UK and German 10-year government bond yields to its widest level since 1990.
While the US Federal Reserve only plans to cut rates twice next year, its rate cut on Wednesday resulted in a cumulative easing of 1 percentage point in 2024, twice as much as the BoE so far.
Governor Andrew Bailey this month reaffirmed the BoE’s message that “a gradual approach to removing policy restrictions remains appropriate.”
The BoE’s November forecast that inflation would remain just above its 2% target through 2027 was based on market expectations of four rate cuts next year.
BoE officials have not explicitly said whether they view this pace of reduction as the most likely scenario.
Economists expect the BoE to stick to its vaguer message of gradualism in December’s policy statement.
“We believe it is too early for the BoE to commit to a sustainable tapering cycle or to conclude that the risks of inflation returning sustainably to the 2% target in the medium term have dissipated,” Bank of America analysts said in a note to clients.
Most economists polled by Reuters expect the monetary policy committee to keep rates unchanged (8-1). Swati Dhingra, who has called for faster cuts, is seen as the most likely dissenter.
INFLATION AND WAGE GROWTH ARE TOO HIGH
UK consumer price inflation – which peaked at 11.1% in October 2022, the highest level in 41 years – fell below the 2% target set by the UK in September. the BoE for the first time in three and a half years, but it rose to 2.6% in November.
This figure exceeds the BoE’s forecast of 2.4% and is the highest rate in the group of seven advanced economies. Services price inflation, which the BoE sees as a better indicator of medium-term price pressures, held steady at 5.0%.
The biggest concern is wage growth, which reached an annual rate of 5.2% in the three months ending in October, far higher than the 3% rate most on the policy committee considered compatible with an inflation rate of 2%.
The BoE is waiting to see whether Finance Minister Rachel Reeves’ decision to hit businesses with an extra 25 billion pounds ($32 billion) in employment tax will result in further hikes of prices or by job and salary cuts.
Business morale has collapsed since Ms Reeves’ October 30 budget, and economic output has fallen for two consecutive months for the first time since 2020.
However, most economists say it is too early to know whether this slowdown will put significant downward pressure on inflation.
“We don’t think the data is enough for the monetary policy committee to abandon its cautious and progressive tone,” said Cathal Kennedy, an economist at RBC, adding that the BoE’s new forecasts at its February meeting would be decisive. .
(1 dollar = 0.7882 pounds)
