Ahead of this week’s interest decision from the Bank of England, Shaan Raithatha, Senior Economist & Strategist at Vanguard has commented. Shaan’s comment can be seen below:
“We expect no change to UK monetary policy at the Bank of England’s (BoE) meeting on Thursday (1st February), keeping the Bank Rate at 5.25%. But, given the large undershoot to the inflation forecast in recent months, we expect the tightening bias to be dropped and instead anticipate monetary policy committee members will lay the groundwork for rate cuts in the middle of the year. Starting to cut as early as the Spring seems too early in our view, given the persistence of core/services prices.
Since the BoE’s November Monetary Policy Report (MPR), inflation has surprised significantly to the downside, reflecting significantly lower wholesale energy prices, coupled with softer core goods prices. We therefore expect the February MPR projections to bring forward the timing of when inflation is expected to reach 2% from end-2025 to Q2 2024, in line with our forecasts.
However, the outlook for core CPI is much more important. Here it is less clear cut. The softening of services and wage growth is encouraging, but at annualised rates of 6-7%, they are still well above mandate-consistent levels. At the same time, growth data in Q4 has been relatively firm, and the recent loosening in financial conditions will support activity in the quarter ahead. The upcoming Spring Budget, which will likely include income tax cuts, will also induce greater demand. This is why we think a Spring start to rate cuts would probably be too early, and still forecast core CPI to be around 2.5% by year-end.
In terms of the vote split, the central case is a 9-0-0 vote in favour of keeping rates on hold, with the previous ‘hikers’ unlikely to maintain their resolve. It is conceivable that dove Swati Dhingra votes to cut rates, though. We continue to expect rate cuts to start around the middle of the year and for the Bank Rate to end 2024 at 4.25%, 100bps lower than its current level.”
