Bank of England Expected to Maintain Bank Rate This Month, But Anticipated Cut in November, Economists Predict: Reuters Poll

By Shaloo Shrivastava

BENGALURU – Economists predict that the Bank of England will maintain its main interest rate at 5.00% in the upcoming week but may implement a reduction in November, despite expectations that inflation will remain above the central bank’s target of 2%. This view is supported by a significant majority in a recent economists’ poll.

In August, the Bank of England decided to lower its Bank Rate to 5.00%, down from a 16-year peak of 5.25%, following a narrow 5-4 vote. Governor Andrew Bailey emphasized the need for a cautious approach to ensure inflation remains controlled.

Inflation rates had reached 2% in May and June, but slightly increased to 2.2% in July and are not expected to fall below the target until at least 2026.

Since December 2021, the Bank of England has raised rates by a total of 515 basis points to address surging inflation, which hit an alarming 41-year high of 11.1% in October 2022. The Bank was among the first major central banks to hike borrowing costs following the pandemic.

Despite the overall inflation being near the Bank’s target, increases in service costs and wage growth, which are closely monitored by the Bank, remain above 5%. This situation makes the central bank cautious about easing its monetary policy too quickly.

Recent GDP data indicated that the UK economy stagnated in July, largely due to a significant decline in manufacturing output. However, the Bank’s Monetary Policy Committee is still expected to adopt a slow and steady approach to rate reductions.

"There is still considerably higher wage inflation, service inflation, and the best growth in the G10 for the first half of this year in the UK," stated James Rossiter, head of global macro strategy at TD Securities. "It’s challenging to see a scenario where the MPC considers cutting rates as rapidly as the Federal Reserve."

Meanwhile, both the European Central Bank and the Federal Reserve are anticipated to lower interest rates this month by a quarter-point and by a total of 75 basis points this year.

During the Jackson Hole conference at the end of August, Bailey reiterated that interest rates would need to "remain restrictive for a sufficient duration," indicating that the path forward would be gradual.

In the poll conducted from September 6-11, all 65 economists forecast that the Bank Rate would stay at 5.00% next week. Nearly 80% (49 out of 65) anticipated one more reduction this year, with 48 expecting it in November and one in December. The remaining 16 predicted two additional rate cuts this year.

Interest rate futures reflect expectations of two cuts in November and December, bringing the year-end rate down to 4.50%.

Sanjay Raja, chief UK economist at Deutsche Bank, explained, "We need multiple data points to accurately assess how quickly the disinflation narrative is developing in the UK, and we believe we won’t get that clarity until the decision in November."

Median forecasts indicate a Bank Rate of 4.50% by the end of March, 4.25% by the end of June, and 4.00% by the end of September, reaching 3.75% by the end of 2025.

Of the 15 Gilt-edged market makers surveyed, 13 expect one 25 basis point cut next quarter, while two anticipate two cuts.

Inflation is expected to average 2.1% in the third quarter and 2.5% in the fourth quarter. Median projections suggest an average inflation of 2.6% for this year and 2.3% for next year.

GDP growth is forecast to average 1.1% this year, rise to 1.3% next year, and reach 1.5% by 2026.