Doha: Qatar National Bank (QNB) expects that the Bank of England will take a new path for its monetary policy, and begin an easing cycle and reduce interest rates, at its next meeting, scheduled for August 2024, and this step will be supported by the decline in headline inflation below the target level, the state of economic recession, and constrained financial conditions.
The bank said in its weekly note that it expects the August policy meeting to mark the beginning of a gradual monetary easing cycle, with two 25 basis points cuts.
The report noted that the UK has experienced one of the worst post-COVID inflation outbursts among advanced economies. In response to it, the Bank of England (BoE) initiated a hiking cycle at the end of 2021 that increased its benchmark interest rate 14 times. This sequence of decisions raised the interest rate from 0.10% to a 16-year high of 5.25%, a level that has been maintained since August 2023. Simultaneously with that, the BoE began a quantitative tightening phase, that
saw it reduce its stock of UK gilts and corporate bonds. That reduction also adds to the tightening of rates.
QNB discussed three factors that supported their outlook regarding the start of an easing cycle. The first was that the BoE has managed to bring prices under control, providing a strong argument in favor of a pivot in interest.
“Since headline measures of prices can display some volatility in the short term, central banks closely monitor additional measures that reveal underlying and more persistent trends. In this regard, a key measure is core inflation. By excluding the more volatile components, such as energy and food products, core inflation provides a more stable and informative view of the underlying price trends. The last data prints show monthly core inflation rates close to 0.3%, significantly down from the peak of 0.9% at the beginning of last year,” QNB said.
The second is that economic growth is expected to remain lackluster, even as the UK is headed for a recovery after a mild recessio
n in 2023. In the second half of 2023, economic activity contracted for two consecutive quarters by 0.4%, in part due to the impact of tighter monetary policy. The BoE argues that business surveys have remained consistent with a slower pace of underlying growth of only 0.25 percent per quarter. Labor market indicators also corroborate the view of a soft economy, with the unemployment rate rising 0.6% since Q4-2023.
QNB added that the third reason was that financial conditions have reached highly restrictive levels on the back of a cycle of significant monetary tightening.
The Financial Conditions Index for the U.K. provides a useful summary of financial market conditions. This indicator combines information of short- and long-term interest rates, and credit spreads. The index spiked in the second half of 2023, and is currently at heights that have not been registered since the Global Financial Crisis, amid significant turmoil and instability in financial markets that led to a credit freeze and a banking cri
sis,” the report said.
QNB concluded by saying it expects the BoE is set to begin an interest rate easing phase in its upcoming meeting, a decision that should be supported by below-target headline inflation, economic stagnation, and restrictive financial conditions.
Source: Qatar News Agency