Investing.com - The Bank of England kept interest rates unchanged, as expected, on Thursday, but Deutsche Bank (ETR:DBKGn) expects the UK central bank to announce four rate cuts next year, with a more backloaded cycle.
The decision to keep the Bank Rate unchanged at 4.75% was largely telegraphed, but analysts at the German bank also expected an unanimous vote – instead, three dissenters called for an imminent rate cut.
“Dhingra, Ramsden, and Taylor all voted for an immediate withdrawal of some policy restraint citing sluggish demand and a weakening labour market,” Deutsche Bank said, in a note dated Dec. 19.
“For the majority of the MPC, however, a gradual approach to removing policy restraint was still the preferred route – particularly given the stickier price and wage data we saw this week. In short, today's vote split marked a dovish pivot.”
Additionally, the economic outlook highlighted competing risks facing the Bank of England's Monetary Policy Committee.
On the one hand, growth dynamics have slowed meaningfully – though whether this is a reflection of weaker demand or supply is yet to be determined, the bank said.
On the other hand, progress on domestic disinflation has been modest – and has stalled in some instances, with price momentum expected to pick up in the near-term. Inflation expectations are also drifting higher – which will add to the MPC's consternation around the timing and pace of rate cuts heading into 2025.
Third, uncertainty remains rife. Uncertainty around the economic outlook will only increase from here. The MPC is now grappling with both domestic and external
risks, driven mainly by uncertainty from the Autumn Budget as well as geopolitical and trade policy uncertainty.
“We see only one rate cut in H1-25 (February). And we expect the MPC to deliver three quarter point rate cuts in H2-25, as unemployment pushes past the MPC's estimate of NAIRU (4.5%), wage settlements drop to target-consistent levels, and services inflation resumes a firmer downtrend,” Deutsche Bank added, with the Bank Rate settling nearer 3% in Q1-26.