Bank of England to look at interest rate cuts

Rate Cuts: The Bank of England (BoE) is expected to take the first step towards cutting interest rates from their highest level in nearly 16 years next week after signs that the inflation crisis is abating.

Governor Andrew Bailey and other top officials spent much of late 2023 dismissing speculation about rate cuts as premature and warning about the risks from strong wage growth.

Although, economists are of the view that the time is approaching for the BoE to relax its tough line on borrowing costs, similar to what the US Federal Reserve and the European Central Bank have already done, after recent data on headline inflation, wages and economic growth were weaker than the central bank had expected.

Investors have rushed further ahead and are betting that the BoE will start cutting bank rate as early as May, with three more cuts over 2024 taking it to 4.25 per cent from 5.25 per cent now.

"For that expectation to be realised, we think the BoE needs to at least seem open to the idea in February," economists at HSBC said in a note to clients.

For the first time since September 2021, it was likely that none of the Monetary Policy Committee's (MPC) nine members votes for a rate hike next week and one might back a cut, HSBC said.

The MPC was also seen as likely to drop its message that borrowing costs might need to go up if inflation pressures intensify and could tone down its view that rates will probably have to stay "restrictive for an extended period of time".

The BoE and other central banks were criticised for not acting quickly enough when inflation began to climb, even before Russia's invasion of Ukraine in 2022 caused gas prices to soar.

Britain's consumer price inflation touched a 41-year high of 11.1 per cent in October 2022, more than five times the BoE's 2 per cent target, and then fell only slightly in following months, squeezing the finances of households and raising fears of a price-wage spiral.

Despite a slight rise to 4 per cent in December, inflation is now expected to fall to 2 per cent in the next few months, after a dramatic slump in gas prices in recent weeks.

As recent as November, the BoE was forecasting that inflation would not return to its target until the end of 2025.

(With Reuters Inputs)