The Bank of England is set to cut interest rates only twice this year, financial markets are now forecasting, after a series of stronger than expected inflation figures sparked concerns that borrowing costs will stay restrictive for longer.
Investors have scaled back their expectations for the pace of monetary policy easing by the Bank of England since the start of the year, when they were pricing in as many as six rate reductions.
Higher-than-expected inflation data in the United States forced investors to reconsider how quickly the world’s foremost central banks would loosen monetary policy. Figures this week showed that US prices increased by 3.5 per cent in the year to March, above Wall Street analysts’ forecasts and up from 3.2 per cent, the third rise in a row.
An article by Megan Greene, an external member of the Bank’s monetary policy committee, in the Financial Times reinforced speculation that borrowing costs will remain restrictive for some time. Greene, on the hawkish wing of the MPC, said that she believes rate cuts “should still be a way off”.
Stubborn US inflation has also prompted traders to curb their forecasts for the scale of rate reductions by the Federal Reserve this year to about one or two.
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Analysts have said that the Bank of England will not lower borrowing costs before the Fed to avoid weakening the pound. European Central Bank officials signalled on Thursday that they will lower rates in June after keeping them on hold for the fifth meeting in a row at 4 per cent.
Typically, central banks tend to move in synchronised steps when setting monetary policy. However, the UK economy has performed much worse than the US since the pandemic and slipped into recession in 2023. The UK is also much more exposed to swings in energy prices, which are set to put strong downward pressure on inflation over the second half of this year, while the US has an ample domestic supply of domestic energy.
Rob Wood, chief UK economist at Pantheon Macroeconomics, a consultancy, said: “The UK experienced a minor recession last year while US growth powered ahead, suggesting the potential for earlier and deeper rate cuts in the UK.”
Wood added that interest rates often “diverge when the economies do”.
Separate data from the Bank of England suggested that the drag of higher interest rates on the UK economy had started to fade, with demand for mortgage lending rising sharply and banks’ stepping up loan supply.
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A net percentage balance of 35.9 per cent of lenders surveyed by the Bank said they had experienced a rise in mortgage lending interest over the past three months, up from a balance of minus 31.6 per cent in the previous quarter.
