An anaemic UK economy has most traders betting that Bank of England rate-setters will have little choice but to cut the base rate from 4.75% next Thursday.
The market is pricing in an 84% chance of a cut at the Monetary Policy Committee’s first meeting of the year, and then two more cuts in 2025.
Both Goldman Sachs and Deutsche Bank forecast the committee will vote 8-to-1 to bring down the rate by 0.25% to 4.50%.
The current set of economic data is gloomy. The UK economy edged 0.1% higher in November driven by pub and restaurant trade as well as the construction industry, after shrinking in October and September.
Inflation stands at 2.5%, above the central bank’s 2% target.
Core services inflation fell to 4.4% from 5% at an annual rate, but private-sector pay rose to 6% in the three months to November from 5.5% in the three months to October.
The nine-strong Monetary Policy Committee has long said it wants to see services inflation and wage growth fall below 5% before it feels comfortable cutting rates. But the market thinks the rate-setters will hold their noses and vote for a reduction.
Godman Sachs analyst James Moberly admits the Monetary Policy Committee “faces a tough balancing act” weighing up rising energy prices and weaker sterling, which are likely to push up inflation, against a flagging economy.
Deutsche Bank senior economist Sanjay Raja adds that next week’s meeting “will be anything but uneventful,” as rate-setters will have to “update its economic projections following a spate of largely disappointing activity data”.
The German bank predicts the body will “downgrade its near-term gross domestic product forecasts, raise its near-term consumer price index projections and lift its unemployment rate forecasts for 2025”.
Hargreaves Lansdown head of personal finance Sarah Coles concludes that mortgage holders “won’t be dancing in the streets” if rates are cut next week.
Coles adds: “If you’re on a fixed rate, it’s not going to move the dial significantly overnight, because the market had already largely priced this in.
“Right now, Moneyfacts data shows the average two-year fixed-rate mortgage has inched up from 5.48% at the start of the year to 5.52%.
“It may inch down again in the coming days, but news that mortgage rates might be back where they were a month ago is unlikely to unlock the floodgates.”
