Summer Bank of England Rate Cut Increasingly Unlikely: NIESR

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A summer interest rate cut at the Bank of England is increasingly unlikely, according to economists at the National Institute of Economic and Social Research (NIESR).

The NIESR says the March inflation numbers released on April 17 indicate that the Bank of England may need to exercise some caution in its expected upcoming monetary loosening.

Headline CPI inflation was 3.2% in March, falling from 3.4% in February, but this was above consensus expectations for 3.1%. Core inflation rose 4.2% y/y, down from 4.5%, but beating market expectations for 4.1%.

Services CPI, which is what the Bank of England is mostly looking at, only slowed from 6.1% to 6.0%, against consensus and the Bank of England's projections for 5.8%.

"It is disappointing to learn that UK inflation has not eased as forecast. At this time many families are struggling financially with the cost of living crisis and unfortunately during challenging economic times many are forced to cut back on important monthly outgoings, such as paying their life insurance premiums," says Phil Jeynes, Director of Corporate Strategy at Reassured.

Image courtesy of the NISER.

The NIESR says the fall in the annual CPI inflation rate was expected, given base effects from the large energy and food price increases observed in March 2023.

Economists are unanimous in expecting further falls in inflation in the first half of 2024, partially due to further base effects as well as the April Ofgem energy price cap cut.

But the NIESR says it will be important to keep an eye on month-on-month inflation figures (essentially 'new' inflation) to determine to what extent we will see inflation rebound in the second half of 2024.

In fact, the pace at which inflation softened in March was slower than the NIESR expected due to higher than projected month-on-month inflation.

While indicators of underlying inflationary pressures all fell during the month, they remain high, which may require the MPC to exercise caution in monetary loosening, says the NIESR.

Markets have lowered the odds of a June rate cut - the previously favourite month for the first cut - with August now looking increasingly favoured. Market prices also suggest investors are leaning towards only one rate cut being delivered in 2024.

NIESR’s measure of underlying inflation, which excludes 5% of the highest and lowest price changes to eliminate volatility and separate the signal from the 'noise', fell to 3.1% in March from 3.9% in February.

These measures indicate that underlying inflationary pressures remain elevated – and well above the 2% target.

The NIESR says the Bank of England may need to exercise some caution in its expected upcoming monetary loosening.

Whether a cut will come in June or August will become clearer next month.