One of the key questions on investors’ lips as we head into 2024 is when will central banks decide to cut interest rates.
It’s an issue that has become more urgent in the UK after the three main sectors of the economy contracted sharply and unexpectedly in October. The longer rates remain at elevated levels, the greater the impact of their transmission into the economy, upping the risk of a serious downturn. But stubborn inflation is keeping the Bank of England (BoE) ultra cautious.
No one doubts that in 2024 inflation will continue to cool, given the significant ground that has been gained this year, and that this will deliver the turning point in the direction of interest rates. The Federal Reserve is expected to cut first, but most analysts think the BoE won’t move until June at the earliest. Capital Economics doesn't expect a cut here until late in 2024, in part because this battering tool has risen to a lower peak than most models suggest is necessary. That implies Bank rate, currently at 5.25 per cent, needs to stay higher for longer to compensate. But it concludes that rates will fall to 3 per cent in 2025, lower than the consensus 4 per cent rate, with core inflation touching 2 per cent by early 2025. Pantheon Macroeconomics expects UK rates to fall by 75 basis points in 2024 and by 100 basis points the following year.