By Paul Hannon
The Bank of England will likely lower its key interest rate twice this year, with a first move in August, despite a weak outlook for economic growth, the U.K.'s National Institute of Economic and Social Research said Thursday.
In its quarterly report on the economic outlook, the U.K.'s leading economic research group said the economy likely emerged from a shallow contraction in the first three months of the year, but will grow by just 0.8% in 2024. In February, it expected growth of 0.9%.
"Despite the recent fall in inflation, U.K. growth remains anemic," said Stephen Millard, NIESR's deputy director.
U.K.'s inflation rate likely fell below the Bank of England's 2% target in April, but will pick up again due to energy-price base effects before settling at the target from mid-2025, NIESR said.
However, it expects the BOE to move gradually as it responds to cooling price rises, with a first rate cut in August to be followed by one more by the end of the year, and just two in 2025.
"This path reflects a cautious unwinding of monetary policy by the Bank of England, given the upside risks posed by persistent core inflation, elevated wage growth and geological challenges," it said.
The BOE will announce its latest decision on interest rates later Thursday. Investors anticipate it to leave the key rate at a 16-year high of 5.25%, and also expect the next move to be a cut to 5% on Aug. 1.
NIESR also said that sluggish growth over the foreseeable future means that the government's fiscal rules will be breached, and that tax rises would be needed to keep borrowing within the self-imposed limits. But it said a better course of action would be to junk the rules, which have contributed to the low levels of public investment that have hampered economic growth.
"This makes clear the need to reform the fiscal framework to enable the government to do what is needed for the economy," Millard said.
Write to Paul Hannon at paul.hannon@wsj.com
(END) Dow Jones Newswires
05-08-24 1914ET
