UK base rate cut forecast changes

Macro Commentary

A relatively quiet week as the market continues to digest the recent central bank meetings and the implications for monetary policy. The authorities continue to push back on early rate cuts and will be particularly concerned about cutting too soon, with economists gradually trimming back expectations.

The Bank of England is now forecast to cut rates by 0.85% starting around mid-year, but upside risks to inflation and stubbornly high pay settlements remain the key drivers. Next month’s budget and the pressure for tax cuts adds to the challenging macroeconomic environment.

In the US, the exceptionally strong payrolls report further highlighted the strength and resilience of the underlying economy, and all but rules out a March rate cut. Forecasters still expect an aggressive rate cutting cycle of around 1.35% this year, likely starting in May.

Europe may well be the first major central bank to cut rates, potentially in April, as the economic fundamentals of the bloc remain incredibly challenging. Inflation has dropped significantly, and the growth outlook is bleak, with Germany in particular continuing to struggle.

Geopolitics will continue to drive market sentiment as tensions remain elevated with no clear end in sight. In China, meanwhile, the ongoing weakness in the economy remains a real drag on global growth, with the authorities likely to add further stimulus.

On the exchanges, dollar strength is driving the dynamic on the outperforming US economy, pushing sterling and euro to their recent lows. A huge amount of data next week will likely lead to an increase in volatility.

GBP/USD – 1-year chart

Week Ahead

*Bloomberg survey / Not available

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