Will the United Kingdoms’ Interest Rates Fall Soon?

The financial markets are betting that, despite the negative comments by the heads of the European Central Bank (ECB), the Federal Reserve and the Bank of England, interest rates will fall in the first three to six months of 2024. The loudest negative voice pouring cold water on interest rate cuts is the Governor of the Bank of England, Andrew Bailey.

With the United Kingdom economy flirting with recession and inflation falling below 5% everyone from the Prime Minister downwards to first-time home buyers are saying that interest rates must surely fall soon. Indeed, recent data released from the British Retail Consortium showed inflation dropping to 4.3% in November of this year (a drop of 0.9%), the lowest level since June 2022. 

Despite the good news regarding inflation, after a visit to the North-East, the Governor of the Bank of England said interest rates will not be cut in the foreseeable future. On top of that he reiterated the same point that was made after the last MPC (Monetary Policy Committee) meeting, that it is too soon to have this conversation, which is the Bank of England speak for “go away”. 

The 2% benchmark figure for inflation will not be reached until the end of 2025 as advised by the Bank of England itself. So, whilst the Prime Minister Rishi Sunak has met his political promise of halving inflation, from an economic standpoint it has little significance. Indeed, inflation has dropped from a high of 11.1% in October 2022 to 4.6% in October 2023, but Andrew Bailey has advised that halving it once again could be very difficult. 

The Bank of England are quick to point out that much of the recent falls in the inflation figures are due to falls in Ofgem’s energy price cap, as the spikes caused by the war between Russia and Ukraine come out of the inflation figures. However, to do this again and again would surely be nigh on impossible or exceptionally difficult. The Governor also pointed out that to get to the 2% inflation target is a game of two unequal halves. He went on to say the second half is “hard work” with the remaining task being done by restrictive monetary policy. He further added that the drop in inflation by 2% from 6.7% in September to 4.6% in October, (due to the fall in the energy cap as mentioned above) will not be repeated again.

Interestingly, one highly respected financial institution has advised that their experts are now predicting a 50 basis point interest cut in the fourth quarter of 2024. They went on to say that with the loosening in the labour market interest rates may be reduced by the Bank of England earlier than predicted but expect the bulk monetary easing to take place throughout 2025 culminating in the 2% interest rate target. There are obviously differing views within the financial markets as to when interest rates will be cut, but for first time home buyers and those households struggling with bills and mortgage repayments, the sooner the better.