The City spotlight swings to a hotly anticipated set of economic data on Wednesday, which will help define expectations on the timing of an interest rate cut from the Bank of England.
Inflation will be back at centre stage, with the Consumer Price Index expected to carry on falling toward the BOE’s office target of 2%.
CPI is expected to come in at 3.8% for December, down from 3.9% in the previous month. It would ensure that the annual rate at which prices are rising is continuing to ease, heading away from the peak over 11% in 2022. Double-digit inflation stoked the cost-of-living crisis fuelled by high energy costs after Vladimir Putin’s invasion of Ukraine.
The BOE launched a 14-meeting run of rate hikes in response, led by Governor Andrew Bailey . Now that CPI is getting nearer to its target, there are hopes that the Monetary Policy Committee he chairs will turn toward cutting rates.
That would cut the cost of tracker mortgages and bring down the cost of a wide range of loans, boosting consumers’ spending power and boosting the UK’s flatlining economy.
City experts expect action in Threadneedle Street in the third quarter of this year. Hopes picked up around the time last month’s CPI reading, which fell more sharply than expected, from 4.6%.
Analysis from HSBC expects the trend to continue. Economists at the UK’s biggest bank are eyeing a fall to 3.7%, a slightly bigger fall than consensus forecasts, helped by “a further decline in food price inflation.”
Over a longer timeframe and toward the summer months – in which most forecasters expect the BOE to begin its rate cuts – Dutch bank ING can see a path for inflation to fall under 2% by May.
James Smith, developed market economist, said: “By April, headline inflation is set to fall below 2% and drop to 1.5% in May. We expect it to stay below 2% until November.”
He explained that the return of more normal condtions on energy markets was behind the outlook:
“The most obvious explanation for that projected downtrend is lower natural gas prices. Futures prices for wholesale gas for delivery later this year and into 2025 have roughly halved since the BOE’s November Monetary Policy Report.
“These futures contracts form the basis of the energy regulator Ofgem’s price cap methodology, and it looks like households can expect another sizeable drop in their bills when the cap is next updated in April.”
Such a move would clearly open the way for policymakers to take the base rate down from the 5.25% peak hit in August and where it remains.
There have also been growing calls for it to move to help kickstart economic growth, which has long been absent from the UK, leaving a lacklustre economy circling the generally accepted technical definition of recession: two consecutive quarters when the size of gross domestic product shrinks.
GDP numbers out last week showed anaemic growth of 0.3% month-on-month in November.
The BOE’s next rate-setting meeting is due on Thursday, February 1, when it is likely to keep rates on hold again. Last time around, the nine-member MPC voted by six to three for no change at 5.25%, with the dissenters backing a quater-point rise to 5.5%, rather than a cut. Bailey has signalled that he expects the cost of borrowing to stay at higher levels for longer.
For the City's forecasts to be accurate, policymakers' minds will have to change by May, adding to the scrutiny on the data releases due in the meantime from Mortgage holders, first-time home buyers, City traders and election-year politicians alike.
