The Bank of England may be forced to bring forward the date of its first interest rate cut after three leading forecasters issued a surprise update suggesting the inflation rate will halve to 2% by April.
The Oxford Economics consultancy and analysts at Investec and Deutsche Bank have reassessed their outlook for inflation in 2024 and concluded that the consumer prices index (CPI), which dropped to 3.9% in November last year, will fall below 2% within four months.
A slump in energy prices and the cost of oil on international wholesale markets will, they say, bring down inflation at a faster rate than the Bank of England expected when it reviewed price rises in November.
The independent forecasters said a fresh review next month by officials at the Bank’s headquarters on Threadneedle Street was likely to follow their lead and predict a much lower path for inflation this year.
In a series of speeches before Christmas, members of the BoE’s interest rate setting committee said lending rates would remain high during 2024 to reduce the prospect of a return to galloping price rises.
The Bank’s governor, Andrew Bailey, had predicted a tough battle lay ahead to bring inflation back to its 2% target, pushing back against speculation in the financial markets that official borrowing costs would soon be reduced from their current level of 5.25%.
Since then financial markets have brought forward betting on the first likely interest rate cut to April and raised the likelihood of another five cuts before the end of the year, bringing interest rates below 4% for the first time since January 2023.
At a hearing of the Treasury committee on Wednesday, Bailey said he hoped the recent fall in the cost of mortgages would continue.
“Obviously we have had a big change in market interest rates in the last few months and so the cost of mortgages is coming down,” he said.
Bailey refused to comment on the outlook for monetary policy, but said: “Let’s just take the market for a moment – obviously that is feeding through into mortgage costs and I hope that is something that continues.”
The rates for mortgages fixed over five years have tumbled in response to growing optimism about the fall in inflation.
Investors have tended to disregard warnings about higher costs pushing inflation higher, including concerns about the Suez canal and a spike in shipping costs resulting from the war in the Middle East.
Energy and fuel prices have declined on international wholesale markets, pushing down the cost of heating and transport. The cost of food, which is influenced by transport costs, is also expected to fall steeply this year.
Andrew Goodwin, chief UK economist at the consultancy Oxford Economics, said he expected the CPI to average 2.1% in 2024, down from a forecast in November of 3.1%. “Inflation is on track to return to the 2% target in April,” he added.
Phil Shaw, senior UK economist at Investec, said the impact of tax cuts by the chancellor in the autumn statement, which he believed would raise consumer spending and persuade the BoE to keep interest rates high, was less than expected.
He said inflation would fall to 1.5% in the third quarter of the year and the first rate cut would be implemented in June.
Economists at Deutsche Bank predicted that UK inflation could drop “a little below 2% in April and May”, before hovering around 2% to 2.5% for the remainder of the year.
Sanjay Raja, the chief UK economist at Deutsche Bank, said there were risks to his forecast. He said strong wage increases would put pressure on firms to raise prices and further tax cuts could increase consumer spending, allowing shops to charge more for goods and services.
Raja added: “The recent disruption in global supply chains may also arrest the disinflationary momentum we’re seeing in goods and food prices. We will be monitoring these risks carefully.”
