Bank of England Expected to Maintain Rate but Consider Cuts
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Bank of England's Outlook on Interest Rates
The Bank of England (BoE) has announced plans to keep its primary interest rate steady at 5.00% this month, according to a recent poll conducted among economists. However, many anticipate a potential reduction in November, even though inflation rates are expected to remain above the central bank's target of 2%.
Historical Rate Changes
In a notable adjustment last August, the BoE decreased its rate from a peak of 5.25%—the highest it had been in 16 years. This decision stemmed from a close 5-4 vote within the committee. Governor Andrew Bailey emphasized the need for caution as they aim to maintain low inflation levels in the economy.
Current Inflation and Economic Climate
While the inflation rate was reported at 2% for consecutive months in May and June, it experienced a slight increase to 2.2% in July, and estimates indicate it might not fall back below the target until 2026. The BoE raised its rates significantly between December 2021 and August 2023, with an increase of 515 basis points aimed at combating inflation that reached an alarming 41-year high of 11.1% in October 2022.
Factors Influencing the Bank's Decision
Even with the headline inflation nearing the BoE's goal, the persistent rise in service costs and wage growth—remaining above 5%—has led to a cautious approach. This complexity in economic factors indicates the central bank is hesitant about loosening monetary policy too quickly.
Recent Economic Performance
New GDP statistics reveal that the UK's economy stagnated in July, primarily driven by a steep decline in manufacturing output. Nevertheless, the Monetary Policy Committee appears committed to maintaining a slow and measured approach to interest rate adjustments.
Experts Weigh In
James Rossiter, the head of global macro strategy at TD Securities, pointed out that the UK faces significantly higher wage inflation and services inflation, along with commendable growth rates compared to other G10 nations during the first half of the year. This situation raises doubts about a rapid decline in rates similar to that of the Federal Reserve.
Global Context and Future Predictions
Globally, both the European Central Bank and the Federal Reserve are anticipated to reduce interest rates this month, with a quarter-point cut followed by a total of 75 basis points cut by year-end. At the Jackson Hole conference, Governor Bailey insisted that interest rates need to remain high for a substantial period, hinting at a steady course ahead.
Polling Insights
In the recent survey conducted from September 6-11, all 65 economists predicted that the Bank Rate would hold firm at 5.00% next week. Of those surveyed, nearly 80%—which represents 49 out of 65 economists—foresee one additional cut this year, predominantly in November, with a handful suggesting December. Furthermore, 16 economists expect two rate reductions before the year concludes.
Interest Rate Futures
Market expectations suggest that investors are pricing in two additional cuts in November and December, which could bring the end-year rate down to 4.50%. Sanjay Raja, chief UK economist at Deutsche Bank, explained that the critical economic assessments necessary for understanding the disinflation narrative will likely become clearer just ahead of the November meeting.
Long-term Economic Forecast
Forecasts indicate that the median expectations for the Bank Rate will sit at 4.50% by the end of March, drop to 4.25% by the end of June, fall to 4.00% by the end of September, and reach 3.75% by the end of 2025. The observations from Gilt-edged market makers surveyed indicated that 13 out of 15 expect a 25 basis point cut in the upcoming quarter.
Frequently Asked Questions
What is the current interest rate set by the Bank of England?
The current interest rate set by the Bank of England is 5.00%.
When is the Bank of England expected to cut interest rates?
Most economists anticipate a rate cut in November, with some also suggesting it could happen in December.
What economic factors are influencing the Bank of England's decision?
Key factors include ongoing inflation above the target, wage growth, and service cost increases, which are above 5%.
How have interest rates changed in recent years?
The Bank of England raised interest rates significantly from December 2021 to August 2023 to combat soaring inflation.
What are the predictions for inflation in the UK?
Inflation is forecasted to average 2.1% in Q3 and 2.5% in Q4, with a median forecast of 2.6% for the year.
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