UK interest rates have been predicted to fall to 4.5% this year by the EY Item Club. The group said is was forecasting a fall of 75bps in 2024, with the first cut to come in June.
However, this comes as a less significant reduction compared to the 125bps of cuts predicted in January’s winter forecast as the Monetary Policy Committee’s (MPC) messaging has suggested that rates may need to stay high for longer.
In addition to this, EY is expecting 0.7% growth for 2024, a downgrade from the 0.9% previously predicted. However, 2025 growth predictions were upgraded from 1.8% to 2% as barriers to growth fall away. This includes falling inflation, higher consumer spending, and anticipated reductions in interest rates.
While it is uncertain whether Consumer Price Index (CPI) inflation will decline to the Bank of England’s 2% benchmark in April, due to sticky services inflation, the EY Item Club expects it to do so by the second half of 2024.
EY cited falling prices of wholesale energy, as well as slowing inflation of food and goods prices. It then expects inflation to average just below 2% for the rest of the year.
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Hywel Ball, EY UK chair, said: “Although growth in 2024 is forecast to remain subdued, we still expect this year to mark a turning point for the UK economy and provide a launchpad for a far brighter 2025. High inflation, energy prices and interest rates have mired the UK in economic stagnation in recent years but all three obstacles to growth have now either fallen away already or are expected to diminish in 2024.
“Business investment is predicted to see modest growth this year before accelerating in 2025. Rising business confidence and spending, alongside improved economic conditions, should set the stage for a welcome return to growth in the near future.”
The new forecast brings welcome news for homeowners, with house prices predicted to grow by 1.3% this year. Property prices are then forecast to increase by a further 2% in 2025.
The recent fall in mortgage rates has put a floor under prices, which have shown more resilience than expected at the start of 2024. EY therefore expects an improving economy to drive a steady recovery in house prices this year and in 2025.
Next year is forecast to see more substantial growth of 2.2% with the anticipated fall in interest rates likely to prompt households to borrow more and save less.
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Peter Arnold, EY UK chief economist, said: “The UK may have slipped into a mild technical recession at the end of 2023, but there are still indications that the UK’s extended period of economic stagnation has already started to draw to a close.
“Falling inflation and interest rates, alongside tax cuts, should help unlock growth in consumer spending, house prices and real incomes. While 2024 isn’t expected to be a year of enormous economic momentum, it should provide a stepping stone to a far brighter 2025.”
He added: “The UK’s performance so far this year suggests that stagnation is lifting, with activity surveys signalling a return to growth across various sectors and improved consumer confidence.
“The Bank of England’s next set of forecasts in May should show a period of below-target inflation and we believe that Bank Rate cuts could follow as early as June, with a total of up to 75 basis points of cuts this year. As well as alleviating some of the financial pressures on households, this should also create a more positive environment for business investment.”
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