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How Many Further Cuts For UK Interest Rates To Expect?

Daily Equity = How Many Further Cuts For UK Interest Rates To Expect? - FT

While markets expect only a few cuts due to inflation concerns, analysts foresee a larger room for rate cuts.

UK government bond yields have been to a rocky start in 2025. The 5-year gilts rose by around 0.3% in the first half of the month but returned to their starting point now. While the market suspects fiscal policy changes for this volatility, it is also driven by global factors. The US bond yields have also been volatile.

Not surprisingly, the Bank of England sustained its intention of lower policy rates in the December meeting, following stagnated economic growth and easing inflation rates – close to BoE’s target of 2 percent. Currently, the banks’ policy rate is the highest among developed world countries, at 4.75%.

However, unlike other economies, BoE has not issued any clarity on the extent of further rate cuts. Coming to an equilibrium is tricky, depending on the supply and demand factors for capital. One of the simpler ways of estimation is to look at the economic growth trend. Economies with greater growth are generally the ones with larger foreign investments and higher spending habits which push interest rates up. Accordingly, the UK’s long-term interest rate would seem high. Its post-pandemic annualized productivity is only 0.5% higher compared to the pre-pandemic levels, with labor force issues indicating that actual rates may be even lower.

Additionally, inflation pushes interest rates higher. The UK’s core inflation rate, which was 3.2% over the previous 12 months, is declining even if it is still marginally higher than that of the majority of other industrialized nations. With the exception of one-time tax shocks, underlying price pressures are abating, particularly in the services sector. The central bank’s credibility is unharmed by medium-term inflation expectations, and there aren’t many reasons why the UK’s inflation will be structurally higher than that of other nations.

Even then, markets expect fewer rate cuts going ahead, expecting to halt at around 4 percent. Unlike other developed countries, the UK incurs debt at a rate quite higher than its economic growth rate, which worsens its debt dynamics. While markets expect only a few cuts due to inflation concerns, analysts foresee a larger room for rate cuts, acknowledging the uncertainty of fiscal policies. They expect taxes to increase in line with government spending, keeping fiscal policy sturdy. The bottom line effect would be on employment, which is evident from the recent labor surveys.

UK gilt yields are also expected to fall, reaching the pre-pandemic five-year levels. Though the prospect of rates climbing up prevails, given the higher inflation expectation in the short-term, chances for the rates to fall are higher due to weaker economic growth, and the ongoing global trade turmoil.

When it comes to policy rates, analysts expect frequent cuts in the second half of the year considering that the BoE walks the same path as other central banks in terms of swiveling to accelerated rate cuts.

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