Deciphering the Tea Leaves: When Will the Bank of England Make its Rate Move?

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The Bank of England is set to maintain the bank rate at 5.25% until at least December 14 and throughout the second quarter of 2024, as shown by a Reuters survey.

Despite a decrease in British inflation from 6.7% in September to 4.6% in October, economists are now anticipating a more gradual decline in the third quarter, contrary to the previously expected 50 basis points contraction in November.

This shift in outlook follows Bank of England Governor Andrew Bailey's commitment to take all necessary measures to achieve the inflation target of 2%.

The bank initiated its rate hike cycle early after the pandemic, raising rates by 515 basis points across 14 meetings from December 2021 to August 2023.

In the Reuters poll done on December 1-6, almost all of the 68 economists predicted the Bank of England's rate would remain at 5.25% during its December 14 meeting. However, approximately 30% of economists now expect the first contraction in the second quarter of the following year, marking a decrease from the previous month.

Median forecasts suggest that the rate will stay at its peak for 15 years until the third quarter of 2024, followed by a decline to 4.50% by the end of 2024.

HSBC economists argue that economic indicators point to recovery, and historical patterns suggest persistent inflation, particularly given robust demand in the UK.

In the previous November survey, 39% of participants expected the initial rate cut in the third quarter, whereas the current figure stands at 48%.

Forecasts regarding the rate level at the end of September vary, with 20 economists predicting 5.00%, 20 at 4.75%, 7 at 4.50%, 3 at 4.25%, and 1 at 3.75%. Markets are bracing for a 0.25% rate cut in June, followed by a second cut in September next year.

Despite Bank of England Governor Bailey and the Monetary Policy Committee emphasizing the necessity of maintaining high interest rates in the long term, discussions about lowering them persist.

While Bailey rules out an imminent rate cut, 55% of economists believe there is a higher-than-expected risk of the first cut, while 45% anticipate it will occur later.