When will the Bank of England cut interest rates?

The timing of the Bank of England’s first move to reduce borrowing costs after a two-year hiking cycle is approaching.

After 14 rate hikes taking interest rates from 0.1% to 5.25%, the next move will almost certainly be a cut. Another hike would wreak havoc on UK financial assets.

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The BoE has repeatedly said it will react to economic data. Many would argue recent data warrants lower interest rates.

Inflation has fallen but not yet hit the BoE’s 2% target. Indeed, the UK’s latest CPI reading of 4% is still substantially greater than where the Bank of England would like to see it.

However, ensuring inflation hits 2% is not a precursor to rate cuts. The Bank of England’s rate-setting panel, the MPC, will be aware that the OBR sees inflation falling to 2% in the coming months, echoing the BoEs’ forecasts. 

The Bank of England has held off cutting rates to reduce the risk of inflation heating up again. This now looks unlikely. The significant risk for the BoE and the UK economy is that it is too late to start easing.

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Growth is slowing, and the UK recession has done much of the heavy lifting for the Bank of England regarding reducing prices. If a disinflation cycle starts to build, the Bank of England could well find inflation languishing below the target rate.

Although the UK grew 0.2% in January, its economic data is starting to show signs of weakness. We all know the UK entered a recession in Q4 and is walking down a well-trodden path.

The UK entered a recession due to lower consumer spending, which is usually the first domino to fall. Next is jobs, and then loan defaults rise. We are already seeing signs of a slowdown in the UK jobs market after the unemployment rate rose to 3.9% and vaccines fell in early 2024.

If the BoE isn’t careful, the recession could well be a lot deeper than the shallow recession everyone is predicting. January’s GDP growth will encourage many, but we need to see more positive data points to establish robust growth.

“While this seems positive, GDP fell by 0.1 per cent in the three months to January in line with our forecast last month. In broader terms, UK economic growth has been near-zero since 2022 and GDP per head remains lower than pre-Covid,” said Paula Bejarano Carbo, NIESR Economist.

The Bank of England has to move fast and will likely cut rates by June.

After January’s GDP was released, Susannah Streeter, head of money and markets at Hargreaves Lansdown, said, “These figures are unlikely to be a game changer for Bank of England policymakers, with a June date now largely the earliest expected for an interest rate cut.”

Bond yields are pricing a cut. Equity markets are pricing a cut. Interest rate futures are pricing a cut. This will force the BoE’s hand before long.

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