Goldman Sachs, HSBC and Deutsche Bank all now expect the UK’s first interest rate cut to come in August, rather than June.
This may prove a blow to Prime Minister Rishi Sunak because this will mean the Bank of England will not lower the 5.25% base rate until after the 4 July election date.
The move comes after official data showed yesterday that inflation over the year to April, fell sharply from 3.2% to close in on the Bank’s 2% target. Although economists had forecast a fall to 2.1%.
Also, key services inflation, a closely-watched measure by the central bank’s rate-setting Monetary Policy Committee, was higher than expected.
Goldman Sachs in a note to clients wrote: “Given firmer incoming price and wage data, we no longer expect a June Bank Rate cut.
“First, services inflation came in at 5.9% year-on-year in April, well ahead of consensus expectations and the MPC‘s May projection of 5.5% year-on-year.”
Money markets currently are betting today that there’s only a 10% chance of a rate cut in June, down from over 50% at the start of the week.
However, earlier in the week the International Monetary Fund said the UK should cut rates up to three times this year to continue the economy’s “soft landing” out of a mild recession.
The world economic body said the Bank of England should reduce rates by “about 50 -75 basis points” in 2024, to unshackle the country’s recovering economy after the UK emerged from a technical recession earlier this month.
“Keeping Bank rate constant as inflation, and inflation expectations, fall would raise ex-post real rates, which could stall or even reverse the recovery, and lead to an extended undershooting of the inflation target,” said the IMF in its latest review of Britain’s finances.
