Market News

BY Tim Wallace

Andrew Bailey must slash interest rates six times over the next year to bolster flagging growth, economists have warned.

The Bank of England Governor and his colleagues on the Monetary Policy Committee (MPC) are expected to cut borrowing costs from 4.25pc to 4pc this Thursday.

But a growing cohort of economists predict Bank officials will be forced to go much further over the next 12 months. Six cuts would take the base rate to 2.75pc next year – the lowest level since late 2022.

Peder Beck-Friis, an economist at Pimco, an investment company, said higher taxes, slower growth and the weakening jobs market will all push the Bank to cut rates further next year.

“While inflation has been surprisingly firm, we see good reasons to expect a slowdown. Regulatory price hikes, including in employment taxes, have pushed prices up, but wage growth is softening and the labour market is weakening,” he said.

Companies are passing the £25bn increase in employers’ National Insurance contributions on to customers, but “once this tax shock fades, we expect inflation to ease, as seen in other developed countries”.

“We expect the Bank to accelerate rate cuts later this year, with the policy rate settling near 2.75pc next year,” he said.

Michel Nies, from Citi, predicts rate cuts in August and November before an acceleration from December in the wake of “very likely tax increases in the autumn Budget”, taking the base rate to 2.75pc.

He cites the weakening jobs market as the critical factor. The economy has lost 178,000 employees on payroll over the past year.

Businesses in particular are taking a beating: “The divergence between public and private sector employment growth continues to widen with the former still masking a sustained contraction in the latter,” Mr Nies said.

Bruna Skarica, at Morgan Stanley, also expects cuts to 2.75pc because unemployment has risen to 4.7pc, the highest rate in four years.

“The build-up of slack in the labour market ... can only result in pay and price disinflation over time,” she said. “The laws of economic gravity can be delayed, but not denied.”

These economists remain in the minority, and even this week’s anticipated rate cut will not be entirely uncontroversial.

Policymakers are cutting interest rates even though inflation, at 3.6pc and rising, is well above its 2pc target.

However, monetary policy takes as long as two years to feed through to consumer prices, meaning this week’s rate decision will only fully pass through to inflation in mid-2027 - and will have little effect on the rise in living costs this year.

Jack Meaning, a former Bank of England economist now at Barclays, forecasts a three-way split on the MPC. He anticipates that two policymakers will vote to hold rates, two for a double cut to 3.75pc, and the majority of five backing a move to 4pc.

“Despite these divergent views on both sides, we think the centre of the committee, and ultimately the decisive bloc, will continue on a gradual and careful quarterly rate cutting path, until it reaches 3.5pc in February 2026,” he said.

The most recent three-way split came in May, when external MPC members Swati Dhingra and Alan Taylor voted for a half percentage point rate cut to 4pc.

Earlier in the year, Mr Taylor said he favoured “pre-emptive” rate cuts given the growing “risk of demand stalling” in the economy.