Bank of England: Predictions for the Next Cuts

File image of Andrew Bailey, Governor, Bank of England. Source: Bank of England.

Economists weigh in with their predictions for the next Bank of England interest rate cut following the August 01 decision to lower Bank Rate 25 basis points.

The Bank of England cut interest rates by 25 basis points but was careful not to be drawn into providing guidance as to when a follow-up cut would come.

Money market data gleaned from Overnight Index Swaps shows the market predicts another hike before year-end, seeing a 50% chance of a third.

Governor Andrew Bailey said, the MPC will be "careful not to cut interest rates too quickly or too much."

This all but precludes a cut as soon as September but raises the prospect of a November cut.

The Bank's forecasts showed inflation will start to tick higher again in the coming months, potentially ending the year at 2.75%. The Bank's Decision Makers Panel survey - which it relies on heavily - was released after the Bank's midday decision. It shows firms remain intent on raising prices at above-inflation rates.

"There are also enough signals for us to expect wage growth and inflation to linger above target consistent rates for longer than the MPC expects. We look for the MPC to cut interest rates again in November and February and then pause for six months as disinflation proceeds only gradually," says Rob Wood, Chief UK Economist at Pantheon Macroeconomics.

But other economists say the Bank will likely opt to cut interest rates at a steady quarterly pace going forward.

"We continue to expect the MPC to cut Bank Rate again in November. We then expect the Committee to reduce the policy rate at a quarterly pace thereafter until Bank Rate hits 3% in 2026-Q3," says James Moberly, an economist at Goldman Sachs.

The Bank voted by a thin 5-4 majority to cut Bank Rate, the vote split itself signalling there is no appetite to cut rates at a rapid pace.

Bailey, Breeden, and Lombardelli joined Ramsden and Dhingra in voting for a cut, but Pill (the Bank's Chief Economist), Greene, Haskel, and Mann continued to support a hold at 5.25%.

"The close vote suggests that rapid successive cuts are unlikely. We continue to anticipate a cut per quarter going forward, as we did prior to this meeting, with the next move forecasted for November," says Stefan Koopman, Senior Macro Strategist at Rabobank.

The Bank thinks it can cut interest rates further without risking stoking inflation, but it also raised its own growth projections for 2024 from 0.5% to 1.25%, which is a significant bump.

This means it is cutting into an improving economic outlook, which is quite unusual and speaks of a need to proceed slowly.

"We suspect the Bank will keep rates on hold in September before proceeding with the next 25 basis point cut in November. And the risks to our forecast are tilted towards cuts being a bit slower and smaller than we currently expect," says Ruth Gregory, Deputy Chief UK Economist at Capital Economics.