Interest Rate Cuts: What’s Next?
Deutsche Bank has recently pushed back the likelihood of a final base rate cut in 2025 by a month, from November to December. This change in prediction comes after the bank’s senior economist, Sanja Raja, noted that an interest rate reduction in the final three months of the year was “ultimately a coin-toss between November and December.”
Reasons Behind the Change
The decision to change the predicted timeline for the interest rate cut is largely based on the comments made by Andrew Bailey, the governor of the Bank of England. While giving evidence to parliament’s Treasury Select Committee, Bailey sounded a note of caution, stating that although the path of interest rates will continue to be downwards, there is now considerable doubt about exactly when and how quickly further steps can be made.
Current Interest Rates
Last month, the Bank’s Monetary Policy Committee voted 5-to-4 to cut the interest rate by a quarter point to 4%, its lowest level since March 2023. This was the third cut by rate-setters this year and the fifth since last August. However, with inflation rising to 3.6% in the year to June, and the Bank expecting it to hit 4% this month, some external rate-setters, such as Megan Greene, have voted to hold interest rates due to the risk of higher inflation persistence and the decreased risk of weaker economic demand.
Predictions and Uncertainties
Deutsche Bank’s economist, Sanja Raja, notes that with four members already dissenting and pushing for a ‘skip’ in Bank rate cuts, the deciding vote for any further rate cuts will rest with governor Bailey. The recent Treasury Select Committee hearing saw Bailey make no attempt to push back on the notion that the timing of further rate cuts was up for debate, suggesting that he may be more inclined to wait until year-end before making another rate cut. Additionally, a late 26 November Budget may mean that rate-setters will opt to wait for more clarity around the fiscal outlook before deciding on whether to cut Bank rate further.
Market Expectations
However, Deutsche Bank’s forecast of a December rate cut is an outlier in the money markets. Following Bailey’s comments, many traders no longer expect another rate cut this year, with the next cut only fully priced in by next April. This discrepancy highlights the uncertainty surrounding future interest rate decisions and the potential impact on the economy.
Conclusion
In conclusion, the prediction of a December interest rate cut by Deutsche Bank is a significant change from the previously expected November cut. The reasons behind this change are largely based on the comments made by Andrew Bailey and the current economic conditions. While there is uncertainty surrounding future interest rate decisions, one thing is clear: the next few months will be crucial in determining the direction of interest rates and the impact on the economy. As the Bank of England continues to navigate the complexities of inflation and economic demand, it is essential to keep a close eye on the developments in the money markets and the decisions made by rate-setters.
