Economists expect Bank of England rate cut in November

The Bank of England will keep its main interest rate at 5.00 per cent next week but reduce it in November even though inflation is expected to stay above the central bank’s 2 per cent target, a firm majority of economists in a Reuters poll said.

In August the BoE cut its Bank Rate to 5.00 per cent from a 16-year high of 5.25 per cent in a tight 5-4 vote. However, Governor Andrew Bailey said it would proceed cautiously to make sure inflation stayed low.

Although inflation was 2 per cent in May and June, it rose slightly to 2.2 per cent in July and is not predicted to dip back below target until at least 2026.

The BoE lifted rates by 515 basis points between December 2021 and August 2023 to calm soaring inflation that peaked at a 41-year high of 11.1 per cent in October 2022. It was one of the first major central banks to start raising borrowing costs after the pandemic.

Despite headline inflation being close to the BoE’s target, service cost increases and wage growth – closely watched by the BoE – are still above 5 per cent, making the central bank reluctant to loosen policy too fast.

The latest gross domestic product data showed Britain’s economy stalled in July, as manufacturing output dropped sharply but the BoE’s Monetary Policy Committee is unlikely to change its stance of slow and steady rate cuts.

“The UK has still got much higher wage inflation, much higher services inflation and the best growth across the G10 for the first half of this year,” said James Rossiter, head of global macro strategy at TD Securities.

“It’s hard to envision a world where the MPC looks at that macro backdrop and thinks that they should be cutting as fast as the Fed.”

Global peers the European Central Bank and the Federal Reserve are both expected to cut interest rates this month by a quarter-point and by a total of 75 basis points this year.

Bailey reiterated at the Jackson Hole conference in late August that interest rates would have to “remain restrictive for sufficiently long” and “the course will therefore be a steady one”.

All 65 economists in the Sept. 6-11 poll predicted the Bank Rate (GBBOEI=ECI) will be left at 5.00 per cent next week.

Nearly 80 per cent of economists, 49 of 65, expected one more cut this year. While 48 predicted it in November, one said December. The other 16 saw two more rate cuts this year.

Interest rate futures are pricing in two more cuts, in November and December, to put the end-year rate at 4.50 per cent.

“Having multiple data points to really assess how fast and how speedy the disinflation narrative is building in the UK, that’s something we don’t think we will get until the November decision,” said Sanjay Raja, chief UK economist at Deutsche Bank.

Median forecasts showed Bank Rate at 4.50 per cent at end-March, 4.25 per cent at end-June, 4.00 per cent at end-September and 3.75 per cent by end-2025.

Of 15 Gilt-edged market makers who participated in the survey, 13 predicted one 25 basis point cut next quarter, while a couple expected two.

Inflation was predicted to average 2.1 per cent and 2.5 per cent in Q3 and Q4, respectively. Median forecasts showed inflation averaging 2.6 per cent this year and 2.3 per cent next.

GDP growth was forecast to average 1.1 per cent this year, 1.3 per cent next and 1.5 per cent in 2026.