Bank of England set to hold interest rates but further cuts loom, top economists say

The Bank of England is widely expected to leave interest rates on hold this week, according to a CityAM poll of top economists.

None of the 17 economists surveyed by CityAM thought the central bank would lower interest rates at its next meeting on Thursday. However, all bar one thought policymakers would wave through a cut in November.

Still, economists did not expect the Monetary Policy Committee (MPC) to opt for back-to-back rate cuts later this year, with 94 per cent suggesting that a November cut would be the last of 2024.

The survey signals that economists expect the BoE to take a slow and steady approach to cutting interest rates.

Last month, policymakers lowered the benchmark Bank Rate to five per cent – the first cut since March 2020. However, Threadneedle Street is wary that inflationary pressures have not yet been decisively tamed.

Although the headline rate of inflation is at 2.2 per cent, just 20 basis points above the BoE’s two per cent target, economists widely anticipate that it will increase later this year.

The BoE’s latest forecasts suggest inflation will rise to just under three per cent by the end of the year as the downward drag from lower energy prices fades.

Services inflation, widely seen as a more accurate gauge of domestic inflationary pressures, still remains above five per cent.

ICAEW economics director Suren Thiru told CityAM: “While the economy flatlined in July, a September rate cut is not likely given that some rate setters are still sufficiently nervous over lingering price pressures to delay loosening policy, at least until November.”

Speaking at the Jackson Hole summit of central bankers in the US late last month, BoE governor Andrew Bailey struck a cautious note.

“The second round inflation effects appear to be smaller than we expected,” he said. “But it is too early to declare victory.”

Given the relative persistence of inflation, as well as the robust performance of the economy so far this year, the BoE is expected to be more cautious than overseas counterparts like the US Federal Reserve and European Central Bank. The latter cut rates by 0.25 per cent on Thursday for the second time this year, while the Fed is due to announce its latest rate decision next Wednesday. Money markets are pricing in a 0.25 percentage-point cut, its first since the pandemic.

Nine of the 17 economists surveyed by CityAM thought the Bank Rate would settle at three per cent next year, while a further four expected rates would stand at 3.5 per cent.

“It’s clear the MPC will adopt a ‘slow and steady’ approach to this rate cutting cycle, particularly in light of varied views among the committee around inflation persistence and the extent to which this is now more structurally embedded in the economy,” Alpesh Paleja, interim deputy chief economist at the CBI, said.

“Risks to inflation outlook are probably still skewed to the upside in the near-term, so even a gradual pace of monetary loosening is one to keep an eye on.”