By Hari Kishan and Shaloo Shrivastava
BENGALURU (Reuters) – The Bank of England will cut interest rates four times this year to support a stable economy, economists polled by Reuters said, but added that risks to inflation were on the upside, suggesting policymakers could do less .
Interest rate futures have only been cut twice this year, and recent crashes in global bond markets underscore concerns about rising inflation linked to US President-elect Donald Trump’s protectionist economic agenda.
British inflation unexpectedly slowed last month and core measures of price growth – tracked by the BoE – fell more sharply, pointing to room for further cuts even though the Federal Reserve has just one more rate cut left.
While forward rates are pricing in just two 25-basis-point rate cuts by the BOE for the year, a 60% majority of economists surveyed Jan. 10-15, 38 out of 63, expect four quarter-point rate cuts, raising interest rates at 3.75%. This outlook remained unchanged from last month.
All 65 economists in the current survey expect the central bank to cut the bank interest rate by a quarter of a percentage point on February 6.
Despite this consensus on the near-term outlook, some economists have little confidence in how much of a rate cut the BoE will be able to achieve, echoing recent cautious language from policymakers themselves.
“With core inflation already high and a range of poll-based inflation expectations rising, the BoE is likely to be more hesitant,” JP Morgan economists noted.
“We expect the BoE to still cut in February, but it will be harder for the Bank to send a confident message about future easing if inflation expectations continue to rise.”
All but two of the 25 economists who responded to an additional question said UK inflation was more likely to be higher than their forecasts this year, rather than lower. Consumer Price Index (CPI) inflation was forecast to average 2.5% this year and 2.1% next year.
Matters have been complicated by punitive sell-offs in the pound in recent days and in UK government debt, along with US Treasuries, which have pushed the yield on benchmark 10-year gilt to its highest level since 2008.
“Rising yields is largely a global story,” noted Michael Saunders, senior adviser at Oxford Economics and a former member of the BoE’s Monetary Policy Committee.
“However, if domestic fiscal issues introduce a risk premium to UK assets, then the MPC may need to keep the Bank Rate higher to cushion the inflationary impact of a weaker pound. But we see this as a risk, not our baseline value assumption,” he wrote Saunders.
The UK economy barely grew in the second half of last year. Growth of only 0.9% in 2024 was predicted, and an average of 1.3% this year and 1.5% next year.
(Other stories from the Reuters Global Economic Survey)
