By Hari Kishan and Shaloo Shrivastava
BENGALURU (Reuters) – The Bank of England will cut interest rates four times this year to support a flat-lining economy, economists polled by Reuters said, but they added that risks to inflation are to the upside, suggesting policymakers may end up doing less.
Interest rate futures are pricing in only two reductions this year, and recent ructions in global bond markets underscore rising inflation concerns linked to U.S. President-elect Donald Trump’s protectionist economic agenda.
British inflation slowed unexpectedly last month and core measures of price growth – tracked by the BoE – fell more sharply, suggesting scope for more cuts even though the Federal Reserve may only have one cut left to go.
While interest rates futures are pricing in just two 25 bps rate cuts from the BOE for the year, a 60% majority of economists polled Jan. 10-15, 38 of 63, expect four quarter-point cuts, taking Bank Rate to 3.75%. That outlook was unchanged from last month.
All 65 economists in the current survey expect the central bank to trim Bank Rate by a quarter percentage point on Feb. 6.
Despite that unanimity on the near-term outlook, some economists do not hold much confidence in how many rate cuts the BoE will be able to deliver, echoing recent cautious language from policymakers themselves.
“With underlying inflation already high, and a range of survey based inflation expectations moving higher, the BoE is likely to be more hesitant,” noted economists at JP Morgan.
“We expect the BoE will still cut in February, but the Bank will find it harder to send a confident message about future easing if inflation expectations continue to rise.”
All but two of 25 economists who answered an additional question said it was more likely UK inflation this year will come in higher than their forecasts rather than lower. Inflation as measured by the consumer price index (CPI) was forecast to average 2.5% this year and 2.1% next.
Complicating matters has been a punishing sell-off in the pound in recent days and in UK government debt, along with U.S. Treasuries, which has pushed the yield on the benchmark 10-year gilt to its highest since 2008.
“The increase in yields is mainly a global story,” noted Michael Saunders, senior advisor at Oxford Economics and former BoE Monetary Policy Committee member.
“However, if domestic fiscal concerns introduce a risk premium on UK assets, then the MPC might need to keep Bank Rate higher in order to dampen the inflationary impact of a weaker pound. But we see this as a risk, rather than being our baseline assumption,” Saunders wrote.
The UK economy barely grew in the second half of last year. It was forecast to grow just 0.9% in 2024, and by an average of 1.3% this year and 1.5% next year.
(Other stories from the Reuters global economic poll)
(Reporting by Hari Kishan; Polling by Sarupya Ganguly and Jaiganesh Mahesh; Editing by Jonathan Cable, Ross Finley and Christina Fincher)
