Bank of England May Start Cutting Interest Rates in Q2 as Inflation Eases

• It is a close call whether the Bank of England starts trimming borrowing costs next quarter or in July-September, with only a slim majority of economists expecting it to do so before July as inflation falls towards its target. That is a turnaround from a December poll when more than two-thirds of respondents expected no move until at least the third quarter, as inflation is now seen falling faster.
• Inflation surged to a 41-year high of 11.1% in late 2022 and has proved tricky to tame even though the BoE raised interest rates 14 times from December 2021 to August 2023, taking the Bank rate to a 15-year peak of 5.25%.
• In December, inflation sped up for the first time in 10 months, rising to 4.0% from November's more-than-two-year low of 3.9%, denting market expectations for an early rate cut. The December poll indicates that the Bank of England (BoE) was initially expected to make its first interest rate cut in the third quarter, aligning with global trends seen in the U.S. Federal Reserve and the European Central Bank.
• Respondents, anticipating a Q2 cut, favour May over June due to its alignment with the second-quarter monetary policy report. Analysts, such as Marc Ostwald at ADM Investor Services, emphasize the importance of evaluating underlying economic trends.
• Inflation is projected to drop below target to 1.9% in the next quarter, providing the BoE with room to consider policy easing. The majority of economists foresee a Bank Rate reduction by the third quarter, aiming for 4.25% by year-end. The UK economy is expected to navigate challenges, with a forecasted growth of 0.1%-0.2% per quarter in 2024 and a more optimistic 1.2% growth in 2025.

(Source: Reuters)