Bank of England likely to start cutting interest rates in June, economists say

22 March 2024 , 12:04

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The bank kept interest rates steady at 5.25% this week (Image: PA Media)

The Bank of England is likely to start reducing interest rates in June, economists are predicting.

This comes after the Bank sent out its most dovish signals in years on Thursday, leading markets to increase their bets. Markets now expect interest rates to be set at around 5% in the June meeting, and to fall further in subsequent meetings, reaching about 4.5% by the end of the year.

However, economists are divided over whether the first rate cut will happen in June or August. James Smith, ING's developed markets economist, believes that decision makers will wait until August for their first cut.

However, he added that June would be the first "live" meeting a meeting where they might reduce rates. While it was important to keep rates unchanged at 5.25%, Mr Smith said it was "more importantly" that the Bank kept its guidance unchanged.

The phrase that rates will have to "remain restrictive for sufficiently long" was the same in this week's report as it was in February. Mr Smith suggested that the unchanged forward guidance indicates that markets are correct to place a relatively small probability on a May rate cut.

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He predicts that rates will be down to 4.25% by the end of the year. The Monetary Policy Committee's (MPC) next meeting is on May 9, followed by meetings on June 20 and August 1. Inflation data for April from the Office for National Statistics (ONS), which could show a reading below 2%, will not be released until May 22.

Analysts believe this data will be crucial at the meeting in June. The energy price cap set by Ofgem is expected to drop by 12% for the average household from April 1st. Economists predict this will help reduce inflation to below 2%. Rob Wood, chief UK economist at Pantheon Macroeconomics, said that the initial impact of the minimum wage increase in April will also be visible by the time of the meeting in June.

"That suggests June is the earliest they will cut, but that could be delayed until August," he stated. "We are sticking with our forecast that the MPC will reduce Bank Rate by 25 basis points initially in June, and then at alternate meetings thereafter."

He anticipates rates will fall to 4.5% by the end of the year, and then to 3.5% by the end of 2025. Martin Beck, at the EY Item Club, commented that the Bank had adopted a "more dovish tone" than expected, particularly when suggesting that even if rates were cut, they would remain "restrictive" likely to reduce inflation.

Mr Beck said that the "force of events will push the MPC to start cutting Bank Rate in June," despite the possibility that the MPC may prefer to be cautious in reducing rates.

Lawrence Matheson