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Economist warns easing inflation is too gradual to ‘allow for base rate cuts in the near term’

by LLB Finance Reporter
19th Dec 23 4:00 pm

Official figures are due to be released on Wednesday, expects to show that UK inflation is easing back.

However, experts are cautioning that the “downtrend in inflation” is still too gradual to “allow for base rate cuts” in the near term.

The Office for National Statistics (ONS) are set to reveal the rate of the Consumer Price Index (CPI) has fallen to 4.3% in November, which is down from October’s 4.6% amid slower increase in petrol and food prices.

The Bank of England (BoE) have cautioned bringing inflation down to 2% is some way off and there will be no imminent cuts to interest rates.

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Sandra Horsfield, an economist at Investec, said, “Declaring victory over inflation remains a more remote prospect in the UK than in the US or indeed the eurozone, both of which are visibly closer to target inflation, with lower ‘core’ inflation too.

“The pain this entails for households is clear, which the Bank of England is all too aware of.

“This month, we expect to see further evidence that inflation is heading back down again.

“But that progress is likely to be fairly gradual.”

Horsefield does not expect the BoE to cut interest rates from 5.25% until summer 2024 at the earliest.

Horsfield added, “For the Bank of England, the downtrend in inflation is likely to be perceived as too gradual to allow for rate cuts in the very near term, especially considering the jobs market still looks reasonably robust.

“We continue to expect a first move down in interest rates only in August 2024.”

A policy maker at the Bank of England has said that interest rates will only be cut once they see a slowdown in wage growth.

Monetary Policy Committee (MPC) member, Ben Broadbent has warned that there is still too much uncertainty how the economy is performing before a decision can be made to lower rates.

Average wages are still rising which puts pressure on inflation which is an important indicator for the Bank’s nine-members of the MPC.

Speaking at the London Business School on Monday, Broadbent said, “Given the volatility in the official estimates, and the disparity among the various indicators we have, it will probably require a more protracted and clearer decline in these series before the MPC can safely conclude that things are on a firmly downward trend.”

Broadbent added, “We know that firms were accepting significant increases in wages early this year in order to help compensate employees for the steep rises in the cost of living.”

Andrew Bailey the Bank’s governor has previously warned that companies must avoid raising wages above the rate of inflation as the knock-on effect raises prices in the economy.

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