Inflation is on the run after falling to 4.6 percent in October, more than half its October 2022 peak of 11.1 percent. Markets anticipate it will fall to four percent when the latest consumer price index figure for November is published on Wednesday. If so, that will be brilliant news.
Some now forecast that inflation could fall back to the Bank of England’s long-term target of two percent within just six months.
This will pile further pressure on the BoE governor Andrew Bailey to reconsider his stubborn belief that interest rates may need to rise higher.
The BoE increased base rates for 14 consecutive meetings to today’s 15-year high of 5.25 percent. Last Thursday, it held rates for the third month in a row, raising hopes that it has now finished hiking.
Yet BoE governor Andrew Bailey has been desperately trying to pour cold water on these hopes, and risks freezing out any recovery.
He should be looking to cut interest rates as soon as he dare, as this would ease pressure on mortgage borrowers and hand the UK economy and stock market a much-needed boost.
In the US, where central banker the US Federal Reserve is openly talking of cutting rates next year, stock markets have soared to an all-time high.
Over here, we’re still mired in gloom.
Only savers will be sad to see interest rates fall as savings rates will inevitably follow. So what will 2024 bring?
Markets risk getting ahead of themselves on rate cut hopes as three members of the BoE’s nine-strong monetary policy committee (MPC) still voted for yet another hike at last week’s meeting, said Melanie Baker, senior economist at Royal London Asset Management.
She said: “The MPC still sees it as too early to conclude that services inflation and pay growth are on a firm downward path.”
Baker said it is a different story in the US where inflation fell to 3.1 percent in October and the Fed is more “dovish”, forecasting three interest rate cuts totalling 0.75 percent next year.
ING’s developed markets economist James Smith said markets are nonetheless right to be thinking about rate cuts. “Our current forecast is for an August rate cut, but if markets prove right and the Fed and European Central Bank start cutting in either March or April, we wouldn’t rule out the BoE moving earlier.”
Smith said markets expect four UK interest rate cuts next year, which would bring base rate down to 4.25 percent.
If correct, that would really put a spring in the UK economy’s step.
Carsten Jung, senior economist at the Institute for Public Policy Research, warned the BoE needs to loosen monetary policy to help the UK economy escape today’s near-zero growth. “It takes 18 months for the impact of high interest rates to feed into the economy, and two thirds of the pain from their current levels is yet to come.”
READ MORE: Britain is on brink of a recovery – now watch BoE governor Andrew Bailey sink it
Fawad Razaqzada, market analyst at City Index and Forex.com, said the MPC is uncomfortable with growing rate cut expectations and may keep rates higher for longer than expected. Even though this will cause yet more pain for consumers and businesses, and delay the economic recovery.
However, in the battle between the BoE and reality, reality seems to be winning as it always does in the end. BoE boss Andrew Bailey should know this better than most. Reality has defeated him again and again.
PwC chief economist Barret Kupelian said: “Interest rates seem to have already turned a corner, with 10-year gilts already below the four percent mark. If this persists, mortgage rates could go down faster than anticipated.”
Ben Waugh, managing director of lender More2Life, sees brighter times for borrowers. “As inflation rates steady and house prices settle, many first-time buyers will be more inclined to step onto the property ladder.”
The BoE was slammed for downplaying the inflation threat two years ago. Today, it seems to be overplaying it. The UK economy will suffer if it makes the wrong call again.
It’s beginning to look like we’re winning the war on inflation, but we’ll find out for sure in 2024. The question is when will the BoE notice?