2024-02-20 15:25:16
Par Shaloo Shrivastava
BENGALURU (Reuters) – The Bank of England will begin cutting interest rates in the third quarter, according to a Reuters poll of economists, with a narrow majority expecting the first cut to come in august.
This date is later than that predicted in a January poll, where a small majority of economists estimated that the cycle of rate cuts would begin next quarter, although the latter result was very close.
Since August, Reuters polls have consistently predicted that the first reduction of 2024 would come in the third quarter, with the exception of last month’s poll which predicted the second quarter.
A rate cut in August would mean the BoE would lag behind the U.S. Federal Reserve and European Central Bank, which are expected to start cutting borrowing costs in the next quarter, according to separate Reuters polls.
A run of stronger-than-expected British economic data and comments from several members of the Monetary Policy Committee, who said they needed more evidence of easing price pressures, prompted some economists to lean in favor of a reduction in the third quarter.
Inflation remained stable at 4.0% in January, unchanged from December, but well below the 41-year high of 11.1% reached in October 2022.
The BoE raised interest rates 14 times between December 2021 and August 2023 to calm inflation, taking the bank rate to 5.25%, its highest level in 15 years.
The UK economy faced high inflation and borrowing costs, and entered a mild recession in the second half of 2023.
However, some members of the monetary policy committee were less worried about the recession, with the economy showing signs of recovery, and said they were in no rush to ease policy.
Median forecasts from the Feb. 15-20 poll of 66 economists show the discount rate will remain at 5.25% until it falls to 4.75% in the third quarter, before ending the year at 4.50%.
“We think it will take several more months for the Monetary Policy Committee to feel confident enough in disinflation to cut rates. We expect the first interest rate cut in August,” said Chris Hare, senior economist. at HSBC.
“While the labor market remains tight and wage growth remains high, a sustainable return to 2% (inflation) is not assured.
Just over half of economists expect the first cut to come in the third quarter, while about 42% of them – 28 out of 66 – believe it will come in the second quarter. One economist pointed to the fourth quarter and another expects no reduction this year.
Asked about the month in which the BoE will begin to reduce its interest rates, the 45 participants answered 23 times August, 11 times June, 7 times May, 3 times September and 1 time February 2025.
Of the 12 market makers who answered the question, seven said August, four said May and one said June. The month of August is in line with market prices.
Investors’ bets on interest rate cuts in 2024 were not unreasonable, BoE Governor Andrew Bailey said on Tuesday.
However, when asked what was most likely as to when the first decline would occur, economists were divided. Of the 36 economists who responded, 18 said it would come sooner than expected and 18 said it would come later.
“The Bank of England is concerned that wage growth and services inflation are more stable and slower to fall, which could push back the timing of the first cut,” said James Smith, developed markets economist at ING.
Inflation is expected to fall sharply, averaging 3.5% this quarter, 2.0% in the second quarter and 1.8% in the third quarter, below the 2% target. by the BoE. It should be on average around the objective until 2025.
Median forecasts call for inflation to average 2.5% this year, 2.1% next year and 2.0% in 2026.
The UK economy grew by just 0.1% in 2023 and is expected to grow by 0.3% this year. A rebound to 1.1% and 1.4% growth in 2025 and 2026, respectively, is expected.
(For other articles from the Reuters poll on the global economy:)
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