Why economists think Britain will cut interest rates more sharply | Real Time Headlines

LONDON — British interest rates may fall faster than previously expected, economists say, pointing to the release of key data that suggests inflationary pressures are finally easing.

However, the Labor government’s debut budget Rates due at the end of the month will prove crucial as market participants wait to assess the economic impact.

As of Tuesday, money markets had fully priced in a 25 percentage point rate cut at the Bank of England’s next meeting in November, with a similar cut at the December meeting likely.

That would take the central bank’s key interest rate from a 16-year high of 5.25% at the beginning of the year to 4.5% by the end of the year. Pricing suggests a further decline to 4% by the May 2025 meeting and 3.5% by December 2025.

However, Goldman Sachs economists noted in a report on Monday that rate cut expectations were “significantly lower than market pricing.” They attribute this to their calculation of a neutral real interest rate of 0.8% in the second quarter of 2024 (expected inflation of 2% in the economy at full employment), as well as a rapid decline in UK inflation and Bank of England policy Dove comments from framers.

As a result, they expect the bank rate to be cut by 25 basis points in a row to 3% as early as September 2025 and to 2.75% in November next year.

The Bank of England has remained cautious about the path of inflation over the past three years of painful price increases. When its Monetary Policy Committee voted 8 to 1 Keep interest rates on hold at September 19th meetingit said that “gradual” easing policy remains appropriate, especially as inflation in the services sector remains “high.”

Price growth remains high in the services sector, which contributed 81% to UK economic output in the second quarter of 2024.

But the numbers Published last week James Smith, developed markets economist at ING, said services inflation fell to 4.9% in September from 5.6%, the first time since May 2022 that it was below 5%, which “is a big plus for the economy.” “It could be big news for the Bank of England.”

Services are “somewhat the most important input into the Bank of England’s decision-making process as it attempts to gauge the ‘sustained’ level of inflation in the economy,” Smith said in a note.

Smith added that the Bank of England had forecast interest rates at 5.5% in September, meaning the actual number was “significantly lower than expected”.

title rate UK inflation Meanwhile, UK economic growth fell to 1.7% in September from 2.2% in August, lower than forecasts by economists polled by Reuters and below the Bank of England’s 2% target for the first time in three and a half years.

Inflation has now been close to target for six consecutive months since peaking at 11.1% in November 2022, although more volatility is expected due to the impact on energy markets after price caps set by regulators were raised.

Wage growth data also cooled, with average earnings including bonuses falling to a more than two-year low of 3.8% between June and August.

More broadly, the International Energy Agency believes that fierce conflict in the Middle East has not caused oil prices to surge Instead, mark The oil market will face “a considerable surplus” next year. Global inflation has calmed down enough that the Fed could choose to take Cut interest rates by half a percentage point in September; and the European Central Bank Announced at October meeting The deflation process is “on track”.

“Recent data has reinforced expectations for another rate cut in November. If the positive news around inflation persists, the Bank of England may even cut rates slightly faster than we currently expect,” David Muir said. Home said in a report last week.

“That said, uncertainty about the economic outlook is high and interest rate expectations will be sensitive to what the government announces in the budget,” Muir added.

Instead, economists say the UK’s biggest risks are domestic. The Labor government elected in July said its October budget would be a major shakeup aimed at restarting the country’s economy Weak economic growth.

Prime Minister Keir Starmer Warns budget will be ‘painful’ for the country as it needs to close what the government says is a £22 billion ($29 billion) funding gap left by the previous administration — Some of its members dispute this figure. Finance Minister Rachel Reeves said last month The country will not return to “austerity” but again said tough decisions will need to be made before Labor fully implements the changes it wants to see.

Labour’s message raises considerable uncertainty about how major fiscal consolidation will be achieved, especially as the government has ruled out raising key taxes on income, sales and businesses. It’s unclear what measures will be taken to cut spending or stimulate industry in the future.

Gilles Moëc, chief economist at AXA Group, said the Bank of England should take into account the coming “front-end fiscal consolidation efforts” and accelerate the pace of monetary easing.

“Politically, Keir Starmer can still blame the legacy of the Conservative government for the need for painful fiscal measures – an argument that will soon fade away,” Moeke said in a note on Monday express.

“From an economic perspective, frontloading could persuade the Bank of England to accelerate interest rate cuts, given the immediate suppression of demand, thereby leading to inflation. Given the UK’s strong sensitivity to interest rates and the speed of monetary policy transmission, many of the adverse effects of fiscal tightening are likely to be offset by the currency stance,” he said.

However, expectations are growing that fiscal policy in the budget will be looser than previously expected, Deutsche Bank economist Sanjay Raja said on Monday.

Raja issued new forecasts, predicting that bank interest rates will rise continuously in the coming months, reaching 3.75% by May 2025, and then cut rates every quarter until reaching 3%, but he said that loose fiscal policy may This led to the Bank of England suspending interest rates at 3.75%.

Ruth Gregory, deputy UK chief economist at Capital Economics, said on Friday she expected net fiscal easing to be around £18bn in 2029-2030 relative to previous plans. That’s 0.6% of GDP, as Reeves tries to balance tax increases and increases tax revenues.

“The result will be fiscal policy that is looser than previously planned, but interest rates higher than otherwise planned,” she said.