The Bank of England will cut interest rates six times this year despite signs that inflationary pressures might be on the rise again, according to a leading analyst.
Simon French, head of research at Panmure Liberum, expects the Bank of England to shift to a faster pace of rate cuts later in 2025, meaning the Bank rate would drop to 3.25 per cent.
“We don’t think the pivot to a faster pace of UK rate cuts from the Bank of England is imminent,” he said. “That will have to wait until the late summer”.
French’s view is an outlier. Financial markets have priced in three rate cuts this year, reflecting lingering fears about the persistence of inflation.
While acknowledging that inflation expectations have increased since last summer, French said he doubted whether these factors would translate into persistent price pressures down the line.
Although the increase in national insurance will put up costs for firms, French said firms would struggle to pass on the extra costs to consumers.
“Strong demand conditions that facilitated a high pass-through of input prices in 2022/23 have been replaced by a rather softer UK demand backdrop and commensurately lower ability for broad-based pass-through to end consumer prices,” he wrote.
And while commodity prices have been increasing, French noted that the proportion of the inflation basket rising at more than three per cent has fallen to a 39-month low.
This means inflationary pressures are relatively concentrated, suggesting “underlying progress” on inflation has not been interrupted.
French suggested that increasing trade tensions in the global economy could actually help to weigh on inflation, a possibility he argued markets were not putting enough weight on.
“Should this (tariffs) mean that trade surplus countries look to offset these levies with a weaker exchange rate, and/or prioritise other markets for sales there is a reasonable chance that this could have a disinflationary impulse,” he said.
Other economists have also raised the potential for tariff-induced trade disruption to reduce price pressures in the global economy.
Swati Dhingra, a rate-setter at the Bank of England, has previously argued that large exporters like China would likely try and maintain their market share by lowering prices.
Policymakers at the Bank of England will meet tomorrow to decide on interest rates and are widely expected to back a third rate cut.