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Para ekonom yakin Inggris akan menurunkan suku bunganya secara tajam seiring dengan berkurangnya tekanan inflasi
2024-10-23
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Economists note that UK interest rates may be falling faster than previously expected, with the data suggesting that inflationary pressures are finally easing. The Labour government's first budget, due at the end of the month, will prove crucial as market participants wait to assess its economic impact.
As of Tuesday, money markets had fully priced in a 25 basis point rate cut by the Bank of England at its next meeting in November, and saw a strong chance of a similar cut at its December meeting.
That would take the central bank's key rate from a 16-year high of 5.25% at the start of the year to 4.5% by the end of the year. Pricing suggests a further fall to 4% by the May 2025 meeting and to 3.5% by December 2025.
However, Goldman Sachs economists predicted in a note on Monday that the rate cuts were "significantly less than market pricing." They attribute this to their calculation of a neutral real interest rate of 0.8% in the second quarter of 2024, or 2% inflation in an economy at full employment, as well as a rapid decline in UK inflation and dovish rhetoric from BoE policymakers.
As a result, they expect the BoE to cut rates by 25 basis points, to 3% as early as September 2025 and to 2.75% in November next year.
The BoE has been cautious about the path of inflation over the past three years of painful price increases. When the Monetary Policy Committee voted 8-1 to keep interest rates unchanged at its September 19 meeting, it said a "gradual approach" to easing policy remained appropriate, especially as services inflation remained "persistently elevated."
Price increases remain high in the services sector, which accounts for 81% of UK economic output in the second quarter of 2024.
But data released last week showed services inflation fell to 4.9% in September from 5.6%, the first time it has been below 5% since May 2022. James Smith, developed markets economist at ING, said this was "potentially big news for the Bank of England".
The services sector "is by some distance the most important indicator in the BoE's decision-making process as it tries to gauge the 'sustained' level of inflation in the economy," Smith said in a note.
The BoE had forecast a 5.5% rate for September, Smith added, meaning the actual number was "substantially below expectations".
Meanwhile, headline inflation fell to 1.7% in September from 2.2% in August, below forecasts by economists polled by Reuters and below the BoE's 2% target for the first time in three and a half years.
From a peak of 11.1% in November 2022, inflation has now been close to target for six straight months, although more volatility is expected due to the impact of energy markets after the price cap set by the regulator was raised.
Wage growth data also cooled, with average earnings, including bonuses, falling to a more than two-year low of 3.8% in the June-August period.
More broadly, the raging conflict in the Middle East has not driven oil prices soaring, with the International Energy Agency (IEA) warning that the oil market faces a "sizable surplus" next year. The global inflation situation has calmed enough for the Federal Reserve to decide to cut interest rates by 0.5 percentage points in September; the European Central Bank (ECB) declared at its October meeting that the anti-inflation process is "well underway."
"Recent data have reinforced expectations for another rate cut in November. If the positive news on inflation continues, the Bank of England may cut rates slightly faster than we currently expect," David Muir, senior economist at Moody's Analytics, said in a report last week.
"That said, uncertainty about the economic outlook is high and interest rate expectations will be sensitive to what the government announces in the budget," Muir added.
Risks remain
Instead, economists say the biggest risks for the UK are domestic. The Labour government, elected in July, said its October budget will be a major adjustment aimed at restarting the country's sluggish economic growth.
Prime Minister Keir Starmer warned that the budget will be "painful" for the country because it will need to plug what the government says is a 22 billion pound ($29 billion) fiscal gap left by the previous administration - a figure that some members of the government dispute. Chancellor Rachel Reeves said last month that Britain would not return to "austerity" but again said tough decisions needed to be made before Labour could fully implement the changes it wants to see.
The message from Labour has created considerable uncertainty about how major fiscal consolidation will be achieved, especially now that the government has ruled out raising income, sales and corporate taxes. It is unclear what exactly lies ahead in terms of spending cuts or stimulus for industry.
Gilles Moec, chief economist at AXA, said the Bank of England should take into account the upcoming "front-load fiscal consolidation efforts" and accelerate the pace of monetary easing.
"Politically, Keir Starmer can still blame the need for painful fiscal measures on the legacy of the Conservative government - an argument that will soon fade," Moec said in a note on Monday. "From an economic perspective, an early rate cut could persuade the Bank of England to cut rates faster, given the immediate dampening of demand and inflation. Given the UK's high sensitivity to interest rates and the speed of monetary policy transmission, many of the adverse effects of fiscal tightening can be offset by the stance of monetary policy."
However, Deutsche Bank economist Sanjay Raja said on Monday that expectations are growing that fiscal policy in the budget will be looser than previously thought.
Raja released a new forecast that expects the Bank of England's interest rate to be cut sequentially in the coming months to 3.75% by May 2025, and then quarterly until it reaches 3%. But he said looser fiscal policy could lead the Bank of England to pause at 3.75%.
Ruth Gregory, deputy chief UK economist at Capital Economics, said on Friday she expected net fiscal easing of around 18 billion pounds, or 0.6% of GDP, in 2029-30 as Reeves tries to balance tax increases, increased investment spending and easing cost-of-living pressures while avoiding austerity.
"The consequence will be looser fiscal policy than previously planned, but higher interest rates than previously planned," she said.
The above information is provided by special analysts and is for reference only. CM Trade does not guarantee the accuracy, timeliness and completeness of the information content, so you should not place too much reliance on the information provided. CM Trade is not a company that provides financial advice, and only provides services of the nature of execution of orders. Readers are advised to seek relevant investment advice on their own. Please see our full disclaimer.
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