Bank of England governor Andrew Bailey expects four interest rate cuts next year if the economy continues to benefit from easing inflation.
The leader of the central bank was speaking at the FT’s Global Boardroom conference in London, against a backdrop that has seen general prices fall to 2.3% from a peak of 11.1% in October 2022. Its official target is 2%.
The BoE does not make formal projections on interest rates, but its forecasts for inflation and growth in the economy rely on market expectations of rates’ future direction.
When asked about investor expectations, built into its November economic forecast, of four 0.25% cuts next year, Bailey said: “We always condition what we publish in terms of the projection on market rates, and so as you rightly say, that was effectively the view the market had.”
Pressed if, under the BoE’s central forecast for 2025, the rate-setting Monetary Policy Committee would carry out about four interest rate cuts, Bailey replied, “Yup.”
He added: “[Inflation] has come down faster than we thought it would. I mean, a year ago we were saying that inflation today would be around 1% higher than it actually is.”
The MPC has long said it wants to see services inflation and pay rises fall below 5%.
The latest readings hover around that level. Services annual inflation rose from 4.9% to 5% in October, while regular earnings lifted by 4.8% from July to September from a year ago.
The cost of borrowing is currently 4.75%, after two 0.25% rate cuts this year. Its initial August reduction was the first in four years.
Bailey said: “We’ve been looking at a number of potential paths ahead — and some of them are better than others.”
The governor added that while a number of different inflation scenarios were possible, the central forecast in the Bank’s latest monetary policy report implied it would pursue “gradual” interest rate reductions.
However, UK interest rates will fall more slowly than expected, while growth will rise over the next two years due to around £70bn of new spending earmarked in October’s Budget, the Organisation for Economic Co-operation and Development said today.
The international thinktank said: “Wage-driven pressures on the price of services and the fiscal stimulus will keep underlying price pressures elevated, leaving headline inflation above target over 2025-26.”
