City experts think the Bank of England will cut interest rates on Thursday, with concerns about the UK’s sluggish economy set to outweigh stubborn inflationary pressures.
Members of the Monetary Policy Committee (MPC) are widely expected to back a third interest rate cut this week, which would bring the benchmark Bank Rate down to 4.50 per cent.
But rate-setters are likely to signal a cautious approach for the remainder of the year given lingering price pressures in the economy.
“Gradualism, we think, will remain front and centre for the MPC given two-sided risks to the inflation outlook,” Sanjay Raja, chief UK economist at Deutsche Bank said.
Economists expect the Bank’s latest forecasts, which will be released alongside the decision, to show weaker growth and higher unemployment compared to the Bank’s November outlook.
Back then, the Bank forecast growth of 1.5 per cent for 2025, but many analysts expect the new estimate to be closer to one per cent.
The economy has barely grown since last summer’s general election, with many analysts blaming the government’s gloomy rhetoric and the tax rises announced in the Budget.
Surveys suggest consumer and corporate confidence remain subdued at the start of the year, which will keep a lid on growth in the short-term.
Although growth will be weaker, economists think inflation will also be revised higher, particularly in the short term.
Energy prices have increased since November, while the pound is also weaker, forcing up the cost of imports. In addition, surveys suggest firms are passing on more of the costs imposed by the national insurance hike than Bank officials had assumed.
The latest figures put inflation at 2.5 per cent in December, below expectations, but many economists think inflation could reach as high as 3.3 per cent by the spring.
The Bank’s previous forecasts suggested that inflation would peak around 2.8 per cent.
The optics of cutting rates while revising up their inflation estimates will create a communication challenge for the Bank, but rate-setters will likely emphasise that weaker growth will weigh on inflation in the longer-term.
“The weaker growth outlook will probably translate into an inflation forecast that is again below the inflation target,” Matt Swannell, chief economic adviser to the EY Item Club said.
Economists at Barclays said the new forecasts would “exacerbate the divergence between a near-term overshoot and medium-term undershoot of inflation.
Markets are pricing in around two or three cuts this year, although some economists expect the Bank to cut rates more aggressively.
The Barclays analysts said the Bank would look to “retain maximum optionality” around the rate outlook.