The Bank of England (BoE) is expected to keep its policy rate unchanged at 5.25% at its next meeting on November 2, according to a Reuters poll of economists. The majority of respondents believe that the BoE has reached the peak of its tightening cycle and will not raise rates again this year, despite high inflation.
Inflation remains elevated but core inflation slows down
The UK inflation rate stayed at 6.7% in September, the highest level among major advanced economies and more than three times the BoE’s 2% target. The main drivers of inflation were rising energy and food prices, as well as supply chain disruptions and labour shortages caused by the pandemic and Brexit.
However, core inflation, which excludes volatile items such as food and energy, slowed down to 4.1% in September from 4.3% in August, suggesting that some of the inflationary pressures may be transitory. BoE Governor Andrew Bailey said last week that September’s inflation data was not far off what the Bank had expected and that the decline in core inflation was “quite encouraging”.
BoE faces a delicate balancing act
The BoE has raised its policy rate by a total of 515 basis points since December 2021, when it started to tighten monetary policy in response to rising inflation expectations and strong economic recovery. The BoE was the first major central bank to hike rates after the pandemic and has been more aggressive than its peers in normalising its policy stance.
However, the BoE also faces a delicate balancing act between containing inflation and supporting growth, as the UK economy faces several headwinds, such as higher taxes, reduced government spending, energy crisis, supply chain bottlenecks and labour market frictions. The BoE has acknowledged that these factors could weigh on economic activity and consumer confidence in the near term.
Economists expect a rate cut in 2025
According to the Reuters poll, 61 out of 73 economists predicted that the BoE would keep its policy rate at 5.25% on November 2, while only 12 expected a quarter-point increase to 5.50%. However, 16 out of 28 economists who answered an additional question said that the probability of another rate hike this year was high.
The poll also showed that economists expect inflation to gradually decline over the forecast horizon, but not reach the BoE’s target until the second quarter of 2025. The average inflation rate was projected to be 3.0% in 2024 and 2.2% in 2025.
The majority of economists also anticipated that the BoE would start to cut its policy rate in the third quarter of 2025, with a median forecast of a 25 basis point reduction. About one-third of economists expected the BoE to act earlier than that.
