There are signs that Britain could finally be in store for an end to the 16-year high Base Rate of 5.25 percent when the Bank of England (BoE) meets tomorrow.
With inflation now at the Bank of England‘s target of two percent, mortgage holders and economists alike have been clamouring for a cut to interest rates.
The BoE’s Monetary Policy Committee (MPC) will announce its decision at midday on Thursday, but there are signs today that a cut could be coming.
Traders – encouraged by drops in the rate of inflation across the world – are placing the probability of a rate cut at more than 60 percent.
That’s up 20 percent from what what traders in swap markets though when it was first revealed that UK inflation was at the Bank of Englands target.
“Market expectations for a rate cut have been ticking up, I think it’s a disinflation narrative . . . there’s been underwhelming data from Europe and that has tipped the balance in favour of a BoE rate cut this week,” Ranjiv Mann, a portfolio manager at Allianz Global Investors, told the Financial Times.
Yesterday figures showed that the Eurozone’s economy grew 0.3 percent in the second quarter of 2024 but consimer confidence is thought to be fragile.
The UK’s inflation figures have recently been welcome news, but there are fears that economic growth will follow the downward trajectory of the US.
“We think the UK needs easier rates because the growth outlook is soft,” said head of developed markets strategy at Amundi Investment Institute Guy Stear.
Whether the rate cut will come on Thursday is still unknown and BoE chief economist Huw Pill pointed out earlier this month that the factors driving inflation were showing “uncomfortable strength” and concerns persist about services inflation which was at 5.7 percent in June.
But a slow in earnings growth in the three months to May and a drop in job vacancies are among factors that make traders and investors optimistic for a cut.
Abrdn economist Sree Kochugovindan believes there is enough at play to “tip” the Bank of England towards making a cut in what would be a welcome relief for mortgage holders.
John Pattullo of Janus Henderson believes that the MPC are less focused on services inflation than they were and argued that “current rates are restrictive” and lacking the justification of above-target inflation across the board.
Inflation dropped to the BoE target two months ago, and has remained there ever since.
