November 6, 2024
Bank of England poised to cut UK interest rates #UKFinance

Bank of England poised to cut UK interest rates #UKFinance

CashNews.co

The Bank of England (BoE) is widely expected to reduce interest rates this week, providing a much-needed reprieve for borrowers. However, expectations for a further cut before the end of the year have dwindled in the wake of the autumn budget.

On Thursday, the BoE’s Monetary Policy Committee (MPC) will announce its latest decision, with economists polled by Reuters forecasting a quarter-point reduction in the benchmark rate, bringing it down to 4.75%. This follows the Bank’s first rate cut in over four years, made in August.

However, markets are now less optimistic about the likelihood of another rate reduction before Christmas.

A market survey showed a nearly 90% probability of a rate cut in November, but the likelihood of a second cut in December has dropped significantly. According to Refinitiv data, expectations for a December reduction now stand at 65.2%, down from last week’s 85%.

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The Office for National Statistics (ONS) reported that inflation fell to 1.7% in the year to September, down from 2.2% in August. This marked the first time since April 2021 that inflation had dipped below the BoE’s target, and it came in below market expectations of 1.9%.

Ed Monk, associate director at Fidelity International, said the drop in inflation makes a November rate cut more likely, but added that the real question now is whether borrowers can expect another reduction before the year’s end.

“Ahead of the inflation numbers, the bond market was pricing in three to four quarter-point cuts before the end of next year,” he said. “But that timetable may accelerate if inflation continues to undershoot the Bank of England’s forecast, which is for inflation to tick higher again this year before falling back to target next year.”

Another key factor influencing the BoE’s decision-making is the UK government’s fiscal policy. The autumn budget, which increases government spending by 1.2% of GDP for the coming year, has raised concerns that this additional fiscal stimulus may push inflation higher and limit the scope for further monetary easing.

“The positive data flow over the past month that put consecutive rate cuts on the table for the MPC in November and December has been erased by the budget,” said Robert Wood, chief economist at Pantheon Macroeconomics. Wood pointed out that while inflation has fallen dramatically — from over 11% in late 2022 to below 2% in September — government spending could reignite inflationary pressures, prompting the BoE to slow its rate cuts.

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