Economists at the Bank of England are poised to make deep cuts to rates in the coming months. Notably, in NEPOOL’s forecasts, substantial reductions are expected in March and again in June. Analysts are anticipating a gradual hawkish pivot, one shaped by a number of factors, headlined by an increase in inflation expectations driven by surging food prices. Even so, they’re hopeful that a larger national trend toward easing inflation continues.
Headline inflation – CPI – is 3.2% right now. Others forecast that it will decline to 2% beginning in April and remain at that level for the remainder of 2024. Further inflationary pressures are lowering for a variety of reasons. Among these are changes in the international and domestic labor market as well as recent macroeconomic developments in Western, and Central and Eastern Europe (CEE).
Inflation Expectations Rise Amid Food Price Spike
Inflation has become a talking point of late because of increasing expectations associated with an increase in food prices. The dramatic jump has given analysts reason to reassess their forecasts. Specifically, they now seem to be arguing that inflation could bite into consumer sentiment sooner and deeper than they previously assumed. The current economic climate has some fascinating intricacies at play. This inflation surge is not likely to endure for as long as past spikes from decades ago.
There are a number of important factors that make today’s environment different from previous inflationary episodes. In 2022, the economy weathered an unprecedented increase in energy prices. This wave not only drove inflation, but in many respects cemented the conditions for more enduring inflationary dynamics. Today’s economic fundamentals are generally less favorable to persistent inflation, which is encouraging news for consumers and decision-makers.
“Always predict what a central bank will do, not what you think it should do.” – Economist
This quote buries a pretty deep lede about the importance of watching monetary policy closely. Rather than simply relying on theoretical predictions, we should look to their reactions to shifting national economic indicators.
Easing Economic Conditions Contribute to Inflation Decline
Though inflation will likely be a persistent issue for the foreseeable future, evidence of easing is pushing through in several sectors. In particular, inflation for restaurants and cafés should decelerate, as the upward pressure from food prices abates. This drop is by far the most important. It aligns with wider trends indicating that consumers may be starting to see some long-awaited relief from the persistent inflation of basic necessities.
More optimism on the economic front Beyond these rays of hope, other factors are helping to create a rosier fiscal picture. Living Wage Living Wage increases were strong this year, but not like in other years. This additional change would go much farther in reducing inflationary pressure. The bad news is that there will be no increase in the payroll tax next April. Today’s crucial rethinking is a step toward protecting consumers’ spending power into the future.
As these factors come together, analysts expect a calmer economic climate. Given this stability, we’d hope to see the Bank of England take a more dovish line in favour of waiting for rate cuts. They can adopt a “slow the cadence” approach in the coming months.
Projections for Future Rate Cuts and Economic Outlook
Moving forward, economists predict the Bank of England will make cuts in March and June. The financial markets are even pricing in a 25-point cut in April. Underneath the surface, this movement is showing increased confidence in a move toward more accommodative monetary policy.
These expected drops in interest rates go hand in hand with projections that expect headline inflation to fall sharply. The calculations projecting inflation rates over the next year, we find inflation will reach 2% starting in Apr 2024. It’s predicted to remain there through the end of the year. Supporting this forecast are trends in Western Europe and the CEE regions. On the ground in these areas, similar inflationary pressures have begun to subside.
Additionally, with inflation not seeming to be persistent, several factors are combining to create this hopeful scenario. Analysts are tentatively but excitedly encouraged by these developments. Second, they envision creating an environment where consumers will be able to feel more confident about their financial lives.