By Shaloo Shrivastava
In a recent Multibagger poll, a majority of economists predicted that the Bank of England will lower interest rates one more time this year, in November. This decision comes as British inflation is expected to remain above the target set by the central bank.
During the August meeting, the Monetary Policy Committee reduced the Bank Rate to 5.00% from a 16-year high of 5.25%, with a tight 5-4 vote. Governor Andrew Bailey emphasized the need for "careful" adjustments in borrowing costs moving forward.
Compared to other central banks like the U.S. Federal Reserve and the European Central Bank, the BoE is expected to take a more gradual approach to rate cuts. The Fed and the ECB are both forecasted to lower rates by a total of 75 basis points this year, with the ECB already starting in June and the Fed set to begin next month.
After being one of the first major central banks to raise borrowing costs post-pandemic, the BoE raised Bank Rate by 515 basis points between December 2021 and August 2023 to combat inflation, which peaked at a 41-year high of 11.1% in October 2022.
While inflation briefly fell to the central bank's 2% target in May and June, it rose to 2.2% in July and is expected to stay above target for the foreseeable future. The BoE projected inflation to reach 2.75% by the end of the year.
According to Stefan Koopman at Rabobank, "We're witnessing headline inflation inching towards 2.75%-3.00% by year-end, and unemployment may steady... CPI and survey data shows underlying inflation is indeed receding, but at a snail's pace."
The majority of economists surveyed expect the BoE to maintain the Bank Rate at 5.00% in September, with only three predicting a 25 basis point cut. Median forecasts suggest that the BoE will lower the Bank Rate to 4.75% in November, coinciding with the next round of quarterly economic forecasting from the central bank.
However, market expectations are pricing in two more rate cuts, in November and December, with the interest rate at 4.50% by the end of the year.
Analysis:
In summary, the Bank of England is likely to cut interest rates once more this year in November, according to a majority of economists. This decision is driven by the need to address inflation that has been persistently above the central bank's target. The gradual approach taken by the BoE contrasts with other major central banks, such as the Fed and the ECB, which are expected to implement more aggressive rate cuts. For consumers and investors, this could mean lower borrowing costs but also serves as a signal of the central bank's stance on economic conditions and inflation. As inflation remains a key concern, the BoE's actions will be closely monitored in the coming months to gauge their impact on the economy and financial markets.