LONDON The Bank of England (BOE) will trim bank rate to 5% next week, a majority of economists said in a Reuters poll, and with inflation expected to hover around target, it will embark on a slow and steady reduction path with one more cut this year.

However, markets are only pricing in around a 45% chance of a cut and several economists declined to say whether the first cut would come in August or September. 

Bank rate has been at a 16-year high of 5.25% since last August. The BOE was one of the first central banks to start raising borrowing costs after the Covid-19 pandemic and, like its peers, is now looking at easing policy.

Over 80% of economists, 49 of 60, in the July 18-24 poll said the bank would cut to 5% on Aug 1. However, a similar sample of respondents in a June poll were more convinced of a move next week, with 97% predicting it then.

The bank will publish its quarterly Monetary Policy Report alongside the rate announcement next week and hold a press conference.

"We look for a 25 basis point rate cut at next week's meeting, although the call appears much closer than it did several weeks back. The case for lower rates is far from clear," noted Allan Monks at JP Morgan.

"If rates are lowered in August, it looks likely to happen on a close 5-4 vote."

In June, the rate-setting Monetary Policy Committee voted 7-2 to leave bank rate on hold but some members said their thinking was now "finely balanced".

An August cut would put the BOE ahead of the US Federal Reserve, which is expected to wait until September, but behind the European Central Bank which made its first cut in June and although it paused this month, it said September was "wide open".

British inflation held at 2% in June - the bank's target - but defied forecasts for a slight fall, and while wages grew a bit more slowly, they still increased at a pace normally too strong for the bank, and markets reduced bets on an August move.

Wages rose 5.7% in the three months to May from a year ago, close to double the rate that would be consistent with the BOE's 2% inflation target.

Still, inflation was expected to be relatively benign and close to target through 2025.

Pause for breath

Following August's trim, the bank will pause in September before cutting 25 basis points (bps) in November to put bank rate at 4.75%, median forecasts showed. It will take another breather in December.

Asked what was more likely regarding their end-2024 forecasts, 77% of respondents, or 17 of 22, to an extra question said that bank rate would be higher than they expect.

It will be a similar slow and steady pace next year with 25-basis-point cuts in the first and second quarters, 50bps in the third and 25bps in the fourth, to put bank rate at 3.5% by end-2025.

"A 25 basis points rate cut a quarter, basically. A very gradual path towards where we think the terminal and the neutral rate is, which is just around 3%," said Sanjay Raja at Deutsche Bank.

"We get there in summertime 2026, so it's a very protracted rate-cutting cycle towards neutral policy."

The path for growth will also be steady - the economy was predicted to expand 0.3% each quarter through to the end of 2025.

Across this year, GDP growth will pick up 0.8% before an acceleration to 1.3% next year, a touch faster than expected in June.

  - Reuters