The BoE governor expects four rate cuts in the UK next year as inflation eases

The Bank of England expects to cut interest rates by four next year if the outlook for the UK economy ends, Andrew Bailey said on Wednesday, as he welcomed the latest drop in inflation.

Talking with FT’s Global Boardroom meeting, the governor of the BoE said that inflation has fallen faster than policymakers expected a year ago.

Unlike the Federal Reserve, the BoE does not make interest rate forecasts. However, its forecasts for inflation and GDP depend on the market’s expectations of future movements.

When asked about business expectations, which were set in his November financial session, of a four-quarter contraction next year, Bailey said: “We always base our reports on what we see in the market prices, and as you say, that was the way the market was.”

Asked whether, based on the BoE’s mid-term forecast for 2025, the MPC will make four rate cuts, Bailey said “Yup.”

He added: “We’ve been looking at a number of possible ways forward – and some are better than others.”

Inflation in the UK has fallen to a record low of 11.1 per cent by the end of 2022, with rising prices to come. 2.3 percent in October, above the acceptable 2 percent.

The BoE has also hinted at easing borrowing costs after cutting its benchmark interest rate to 4.75 percent this year, but is treading cautiously due to concerns about inflation.

Mr Bailey said that although different scenarios of inflation were possible, the central forecast in the latest BoE monetary policy report called for a “gradual” reduction in interest rates.

The Governor of the BoE speaks like OECD He predicted that the BoE would not be able to lower rates until peers including the US Federal Reserve and the European Central Bank because of the UK’s growth and the prospect of rising rates.

In its latest economic outlook, the Paris-based agency said UK rates will rise 3.5 percent in 2026 – well above the Fed’s target, which is expected to be 3.25-3.5 percent by then. The ECB is expected to reduce its interest rate to 2 percent by the end of 2025.

The OECD has forecast that the UK economy will grow by 1.7 per cent next year and 1.3 per cent in 2026, up from 0.9 per cent this year, despite tax increases. Autumn budget.

Inflation will be more severe than in many UK peers, the OECD found. Inflation is expected to rise from 2.6 percent this year to 2.7 percent in 2025, above rates seen elsewhere in the G7, before slowing to 2.3 percent in 2026, it added.

Álvaro Pereira, an OECD economist, told the FT that the moderate pace of rate cuts expected at the BoE reflects the need for housing and other stimulus from the Budget, where Chancellor Rachel Reeves has loosened the fiscal policy compared to previous plans.

These factors, together with “strong but not surprising wage growth”, meant that the BoE did not need to “relax too quickly”, Pereira said. Momentum in the UK was positive, the OECD found, with growth set to accelerate next year due to “significant increases in public spending”.

“Inflation will remain above target in 2025-2026, as rising labor costs remain temporary and rising capital prices keep the economy buoyant,” the OECD said in its outlook.

In a Global Boardroom interview, Mr Bailey explained how the BoE might view UK interest rates.

One meant that disinflation was “well integrated”, meaning the BoE could cut rates aggressively. The pessimistic view pointed to a “structural change” in the economy, which would lead to lower inflation and keep monetary policy tighter.

The “moderate outlook”, said Bailey, means that the BoE should “lean back a bit” to keep inflation on track, leading to a reduction in inflation compared to earlier levels.

The BoE’s latest forecast, released in November, focused on the future and rested on market expectations for four rate cuts next year. Exchange rates are currently on a three-fold decline by the end of 2025.

The slow fall in prices so far shows that the UK government’s inflation control, based on the independence of its central bank, has worked, Bailey said.

“(Inflation) has come down faster than we thought. I mean, a year ago we were saying that inflation today will be 1 percent higher than it is,” he said. “This, I think, is a good test for the government. The government cannot stop these distractions from happening. ”

In its opinion, the OECD emphasized the need for “smart” monetary policy, with UK government debt seen above 100 percent and rising.

“With limited liquidity, external shocks that would require financial support pose a major risk to the outlook,” the OECD said, referring to rising global energy prices.

“Furthermore, price pressures due to increased government spending and uncertainty over labor market growth may require long-term currency stability,” it added.

Data visualization by Clara Murray