Bank of England Interest Rate Outlook

By Hari Kishan and Shaloo Shrivastava

BENGALURU (Reuters) – The Bank of England (BoE) is expected to cut interest rates four times in 2024 to support a flat-lining economy, according to economists polled by Reuters. However, they caution that inflation risks lean towards the upside, potentially limiting the number of cuts.

Interest rate futures indicate only two reductions this year, reflecting rising inflation concerns associated with U.S. President-elect Donald Trump’s protectionist economic policies. British inflation unexpectedly slowed last month, with key price growth measures tracked by the BoE showing notable declines. This implies the possibility of further rate cuts, even as the Federal Reserve may have only one cut left in its arsenal.

Although futures suggest just two 25 basis point adjustments from the BoE, 60% of economists surveyed from January 10-15 anticipate four quarter-point cuts, reducing the Bank Rate to 3.75%. This prediction remains unchanged from the previous month.

All surveyed economists expect the central bank to reduce the Bank Rate by a quarter percentage point on February 6. However, confidence in the number of potential cuts remains tepid, reflecting themes of caution from policymakers. JP Morgan economists noted, “With underlying inflation already high… the BoE is likely to be more hesitant.”

While consensus expects a cut in February, rising inflation expectations may complicate future easing efforts. In a supplementary question, almost all economists indicated a higher likelihood of UK inflation exceeding their forecasts this year. Consumer Price Index (CPI) inflation is forecast to average 2.5% this year and decline to 2.1% next year.

Complicated circumstances arise from a recent sharp decline in the pound and UK government debt, alongside U.S. Treasuries, which have pushed the 10-year gilt yield to its highest level since 2008. Michael Saunders of Oxford Economics stated, “The increase in yields is mainly a global story,” but cautioned that domestic fiscal concerns could necessitate maintaining a higher Bank Rate to counteract a weaker pound’s inflationary impact.

The UK economy barely grew in the latter half of last year, with forecasts suggesting an increase of only 0.9% in 2024, along with averages of 1.3% for 2024 and 1.5% for the subsequent year.

(Other stories from the Reuters global economic poll)