By Divya Chowdhury
MUMBAI (Reuters) – The Bank of England is likely to cut interest rates soon, “probably in August”, as long as inflation and wage data align with the Monetary Policy Committee’s (MPC) May forecasts, a former MPC member said on Thursday.
“They have clearly signalled they are willing to cut soon if data are okay,” Michael Saunders, an MPC member at the Bank of England (BoE) between 2016 and 2022, told the Reuters Global Markets Forum (GMF).
“If so, I would expect the rest of the internal (members of the BoE MPC) to move as a bloc to vote for a cut,” Saunders said, adding that the central bank had done enough to prepare markets. The MPC is made up of nine members, five from within the BoE and four from outside the central bank.
The BoE kept its cash rate unchanged at a 16-year high of 5.25% last week, ahead of a July 4 national election, with some policymakers saying their decision not to cut rates was “finely balanced”.
Saunders, a senior adviser at Oxford Economics, expected markets to be relieved with a large Labour party win in the election, saying: “Markets and investors will not be sorry to see the Conservative government end.”
He said Labour – far ahead in opinion polls – would likely lay out tough spending plans for the next few years in its autumn budget, but did not expect major tax hikes to be included other than “modest measures”, such as on private school fees.
“Then, provided the economy is okay, they will gradually add to their public spending plans in subsequent years, while staying well within the fiscal rules,” he said.
Saunders did not see a potential Labour victory impacting the BoE’s monetary policy path.
He sees the BoE cutting rates seven times in increments of 25 basis points (bps) by the end of 2025, putting the cash rate “close” to his neutral rate of 3.5%.
“I expect two to three cuts this year, the rest next year – again, depends a bit on the monthly data,” he said.
Market expectations for rate cuts have reduced significantly over the course of this year, with now barely two 25 bp reductions priced in for 2024.
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(Reporting by Divya Chowdhury in Mumbai; Additional reporting by Bansari Kamdar in Bengaluru; Editing by Mark Potter)
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