The Bank of England is set to start cutting interest rates in June, according to a City A.M. poll of top economists, as inflation nears its target, the labour market cools and the UK takes its first steps out of recession.
The majority (61 per cent) of the 23 economists surveyed thought the Bank would start cutting rates in June, narrowing their bets since last month’s survey.
Just nine per cent believed rate cuts would begin in May, compared with 43 per cent last month, while around a quarter (26 per cent) chose August.
Just under half of the economists (48 per cent) expected the bank would cut rates three times in 2024, with some placing more optimistic bets for four (30 per cent) and five cuts (nine per cent).
The Bank’s Monetary Policy Committee is due to meet on Thursday 21 March for its next rate-setting vote. The benchmark Bank Rate currently stands at 5.25 per cent, its highest level since the financial crisis.
Suren Thiru, economics director at the Institute of Chartered Accountants in England and Wales, told City A.M.: “While the expectation is that interest rates will remain on hold this month, with the economy struggling and inflation slowing, the case for loosening policy by the summer is growing.”
Having peaked at more than 11 per cent in October 2022, inflation has fallen fast and now stands at four per cent. A number of forecasters think that it will fall to the government’s two per cent in the second quarter of 2024, although inflation might pick up again later in the year.
The fairly rapid inflation fall has pressured policymakers to start cutting interest rates. Holding rates for too long risks hampering the UK economy unnecessarily, but loosening too soon could mean inflation does not settle at two per cent.
At the beginning of the year, markets thought that rate cuts could come as soon as March. However, traders have dialled back their bets in response to stubborn inflation and hawkish comments from the Bank.
A number of commentators have criticised the Bank for being too slow, with former chief economist Andy Haldane warning that leaving rates on hold could deepen the recession. But earlier this month Huw Pill, Haldane’s successor, said that rate cuts were still “some way off”.
Official figures showed the UK economy rebounded in January after it slipped into recession at the end of last year, growing 0.2 per cent in the month.
Policymakers are concerned that a tight labour market could keep wage pressures elevated. This would put up costs for firms and give consumers greater spending power.
The Bank’s most recent Monetary Policy Report suggested that there needed to be a “moderation in pay pressures” to bring down services inflation, a key gauge of domestic inflationary pressures.
Latest official data showed signs of cooling in the UK jobs market. Annual wage growth fell to 5.6 per cent in the three months to January, down from peaks of over eight per cent but still far too high to be consistent with the two per cent inflation target.
Meanwhile, unemployment saw its first rise since last July, ticking up to 3.9 per cent from 3.8 per cent and overshooting market expectations.
Alpesh Paleja, lead economist at the Confederation of British Industry, said: “There is probably still a large degree of risk around the monetary policy outlook – hinging around the pace at which domestic price pressures continue to ease.”
Julian Jessop, economics fellow at the Institute of Economic Affairs, added: “Four per cent would be a good level for interest rates in the longer term, broadly consistent with two per cent inflation and two per cent growth in the real economy.
“Anything much lower than this would be a worrying sign that the UK is at risk of Japanese-style stagnation. Anything much higher would suggest that inflation is a bigger problem.”