The majority of economists surveyed by Reuters predict that the Bank of England will lower its interest rate to 5% as early as next week. Inflation is expected to stay near the target level, prompting a gradual and sustained rate reduction, including another cut this year.
That being said, markets estimate a 45% probability of a rate cut, with some economists uncertain whether the first cut will occur in August or September. The bank rate has been maintained at 5.25% since last August, the highest level in 16 years.
The Bank of England was one of the first central banks to hike interest rates following the COVID-19 pandemic and is now considering easing policy, similar to other central banks.
More than 80% of participants in the survey, conducted from July 18 to July 24, expect the rate to drop to 5% on August 1. In June, a similar poll showed that 97% of respondents also anticipated this move.
The Bank of England will release its quarterly report on monetary policy alongside its rate announcement next week and will hold a press conference.
In June, the Monetary Policy Committee voted 7 to 2 to maintain the current interest rate, though some committee members feel their stance has become more balanced.
An August rate cut would position the Bank of England ahead of the US Federal Reserve, which is anticipated to make a rate decision in September, but behind the European Central Bank, which already reduced rates in June and may implement further cuts in September.
Inflation in the United Kingdom remained at 2% in June, matching the Bank of England's target but not reaching the anticipated lower levels. Wages grew by 5.7% in the three months to May compared to last year, nearly double the rate aligned with the Bank of England's 2% inflation target. Despite this, inflation is expected to remain relatively moderate and close to the target until 2025.
Following a potential rate cut in August, the Bank of England is expected to pause in September and then reduce the rate by another 25 basis points in November, bringing it to 4.75%. A pause is also anticipated in December. When asked about forecasts for the end of 2024, 77% of respondents (17 out of 22) stated that they expect a higher rate than previously assumed.
Over the next year, we may anticipate a gradual rate decrease: 25 basis points in the first and second quarters, 50 basis points in the third quarter, and another 25 basis points in the fourth quarter, leading to a rate of 3.50% by the end of 2025.
The economy is expected to grow at a moderate pace of 0.3% per quarter until the end of 2025. GDP growth is projected at 0.8% for this year, accelerating to 1.3% next year, slightly higher than previous forecasts.
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