Andrew Bailey stated that the Bank of England is anticipating four interest rate cuts next year if the UK economy performs as expected, highlighting the recent decrease in inflation as a positive development.
During the FT’s Global Boardroom conference, Bailey mentioned that consumer price inflation has dropped more rapidly than initially projected by policymakers a year ago.
While the BoE doesn’t make official interest rate projections like the US Federal Reserve does, its forecasts for inflation and GDP are influenced by market expectations regarding the future direction of rates.
Responding to inquiries about investor expectations included in the November economic forecast, which suggests four quarter-point cuts in the upcoming year, Bailey acknowledged that this aligns with market sentiments.
When questioned about the likelihood of around four interest rate cuts in 2025 based on the BoE’s central forecast, Bailey confirmed this possibility.
He emphasized that the BoE is considering various potential paths forward, some more favorable than others.
The Bank of England has hinted at further interest rate reductions after adjusting its benchmark rate in two quarter-point increments this year to 4.75 percent. However, caution is being exercised due to concerns regarding persistent services inflation.
Bailey indicated that while different inflation scenarios are feasible, the central forecast in the BoE’s latest monetary policy report implies a strategy of “gradual” interest rate cuts.
Speaking at the same time, the OECD projected that the Bank of England might not lower rates as significantly as other central banks, such as the US Federal Reserve and the European Central Bank, due to the UK’s growth and inflation outlook.
The OECD’s latest economic outlook anticipated that UK rates would stabilize at 3.5 percent in 2026, slightly above the anticipated terminal rate for the Fed.
The organization forecasted a growth rate of 1.7 percent for the UK next year and 1.3 percent in 2026, despite tax increases in the Autumn Budget.
Inflation is expected to be more persistent in the UK compared to its G7 counterparts, with price growth predicted to reach 2.7 percent in 2025 before easing to 2.3 percent in 2026.
Álvaro Pereira, the OECD’s chief economist, noted that the BoE’s slower pace of rate cuts reflects strong domestic demand and additional stimulus from the Budget, allowing for a more measured approach to monetary policy.
He also mentioned that the UK’s momentum is positive, with growth set to accelerate next year due to increased public expenditure.
The OECD highlighted that headline inflation is expected to remain above target through 2025-26, driven by stubborn services inflation and increased demand resulting from government spending.
In conclusion, Bailey outlined three potential scenarios for UK interest rates, with the central view suggesting that the BoE may need to make incremental adjustments to maintain inflation levels.
The BoE’s recent forecasts, centered on market expectations for four rate reductions in the coming year, indicate a cautious approach to monetary policy adjustments.
Moreover, Bailey praised the effectiveness of the UK’s inflation-targeting regime, which has helped navigate unexpected shocks and keep inflation in check.
The OECD emphasized the importance of prudent fiscal policy, particularly in light of rising public debt levels and potential external shocks that could require fiscal support.
Overall, the outlook for the UK economy remains positive, with a cautious approach to monetary policy and a focus on maintaining stable inflation levels.
Data visualisation by Clara Murray
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