Capital Economics analyst Ruth Gregory agreed that there was risk in the public’s view of the Bank of England as policymakers “won’t want to be criticised for raising rates too late and too slowly”.
But she added: “Regardless of whether rates rise this year, the weakness in activity and in the labour market will probably mean rates are cut in 2027.”
Ruth Gregory – Capital Economics deputy chief UK economist
Vote: Hold
What has influenced your decision?
“The US-Iran deal announced on Sunday reduces the immediate pressure to raise rates. Meanwhile, the UK economy’s strong start to the year is now faltering. The latest labour market figures have proved dismal, implying that the forthcoming rise in inflation will prove short lived. And so far, there is little evidence of the second-round inflation effects the Bank fears. So businesses may not be able to make a series of price hikes stick or be able to afford to raise wage growth.
“Modest ‘insurance hikes’ are still possible. Some of the tightening in financial conditions priced into the markets may unwind unless the Bank of England validates the market curve.
“And the Bank of England won’t want to be criticised for raising rates too late and too slowly, as it was in 2022. But regardless of whether rates rise this year, the weakness in activity and in the labour market will probably mean rates are cut in 2027.
“The expected market path of rates looks too high.”