By Jonathan Cable
LONDON (Reuters) – It is a close call whether the Bank of England starts trimming borrowing costs next quarter or in July-September, a Reuters poll found, with only a slim majority of economists expecting it to do so before July as inflation falls towards its target.
That is a turnaround from a December poll when more than two-thirds of respondents expected no move until at least the third quarter as inflation is now seen falling faster.
Inflation surged to a 41-year high of 11.1% in late 2022 and has proved tricky to tame even though the BoE raised interest rates 14 times from December 2021 to August 2023, taking Bank Rate to a 15-year peak of 5.25%.
In December inflation sped up for the first time in 10 months, rising to 4.0% from November’s more-than-two-year low of 3.9%, denting market expectations for an early rate cut. The Bank wants it at 2.0%.
After Wednesday’s inflation data interest rate swaps showed 12 basis points of rate cuts were priced in by May in late trade that day, implying a 50-50 chance of a quarter-point cut to borrowing costs that month, down from an 80% chance the previous day.
But a little more than half, or 38 of 70 economists in the Jan. 17-22 poll, said the first cut would come next quarter as the Bank pivots towards supporting growth and the median forecast put Bank Rate at 5.00% by end-June. No-one expected a move on Feb. 1 or March 21.
In a December poll the first cut was not expected until the third quarter, according to the median forecast.
If realised, that latest outlook would have the BoE acting around the same time as the U.S. Federal Reserve and the European Central Bank.
Of those who had pencilled in a Q2 cut and who also responded to an additional question, a majority said May was more likely than June.
“It’s May rather than June simply because it ties in with the second quarter monetary policy report. For the Monetary Policy Committee it’s going to be a question of evaluating underlying trends,” said Marc Ostwald at ADM Investor Services.
“I don’t have a doom and gloom scenario for the economy. The recession risks are definitely picking up but it’s not a sort of major contraction.”
As a group the economists surveyed were more definitive about the third quarter, with all but four of 70 seeing at least one reduction before end-September. The median forecast put Bank Rate at 4.25% by year-end.
Inflation was seen dropping below target to 1.9% next quarter and hovering around there until mid-2025 at least, giving the central bank room to begin loosening policy and ease the burden on indebted consumers.
“Whether the progress in actual inflation is enough to convince the three hawks on the committee that voted for a hike in the last meeting that upside inflation risks have sufficiently subsided is another issue,” noted Ellie Henderson at Investec.
“This is particularly as moving forward the low hanging fruit from favourable base effects is largely exhausted, and not to mention the inconclusive labour market data the committee has to contend with.”
Britain’s economy has been weathering the storm of high inflation and borrowing costs, and it is expected to skirt a recession. After flatlining last quarter the poll said it would expand 0.1%-0.2% each quarter this year.
Growth this year was put at 0.4% and was seen accelerating to 1.2% in 2025.
(For other stories from the Reuters global economic poll:)
(Reporting by Jonathan Cable; Polling by Rahul Trivedi and Prerana Bhat; Editing by Hugh Lawson)