The Bank of England expects four interest rate cuts next year if its outlook for the UK economy is confirmed, Andrew Bailey said on Wednesday, hailing the recent fall in inflation.
Speaking at the FT’s Global Boardroom conference, the BoE governor said consumer price inflation had fallen faster than policymakers expected a year ago.
Asked about investor expectations, built into their November economic forecast, of a four-quarter-point interest rate cut next year, Bailey said: “We always condition what we publish in terms of the projection of market rates, and as you rightly said, that was actually the attitude of the market.
“We looked at a number of potential paths ahead of us – and some of them are better than others,” he added.
Inflation in the UK has fallen far from its peak of 11.1 per cent at the end of 2022, with price rises at 2.3 percent in October, above the official target of 2 percent.
The BoE has signaled further cuts in borrowing costs after cutting its benchmark rate in two steps of a quarter of a point this year to 4.75 percent, but is moving cautiously on concerns about volatile services inflation.
Bailey said that while several different inflation scenarios were possible, the central forecast in the BoE’s latest monetary policy report implied that a “gradual” rate cut would follow.
The BoE governor spoke as OECD predicted that the BoE would be unable to cut rates against its peers, including the US Federal Reserve and the European Central Bank, due to the outlook for UK growth and inflation.
In its latest economic outlook, the Paris-based organization said UK rates would hold at 3.5 percent in 2026 – just above the Fed’s terminal rate, which is expected to be 3.25-3.5 percent at that time. The ECB is expected to cut its key rate to 2 percent at the end of 2025.
The OECD has forecast the UK economy to grow by 1.7 per cent next year and 1.3 per cent in 2026, up from 0.9 per cent this year, despite tax increases in Autumn budget.
Inflation will be more stubborn than in many other UK countries, the OECD found. Price growth is set to accelerate from 2.6 percent this year to 2.7 percent in 2025, above rates seen elsewhere in the G7, before falling to 2.3 percent in 2026, it added.
Álvaro Pereira, the OECD’s chief economist, told the FT that the BoE’s shallower rate cut path reflected strong domestic demand and additional stimulus from the budget, in which Chancellor Rachel Reeves loosened fiscal policy compared to previous plans.
These factors, along with “some strong but not spectacular wage growth”, meant the BoE did not need to “accommodate so quickly”, Pereira said. Momentum in the UK was positive, the OECD found, with growth expected to accelerate next year due to “large increases in public expenditure”.
“Headline inflation will remain above target during 2025-26, as services inflation remains sticky and rising demand from the consumption package pushes the economy above potential,” the OECD said in its outlook.
In a Global Boardroom interview, Bailey outlined three potential BoE outlooks for UK interest rates.
One implied that disinflation was “well embedded”, which meant the BoE could cut rates more aggressively. A less encouraging outlook pointed to a “structural shift” in the economy, leading to more stubborn inflation and causing monetary policy to remain more restrictive.
The “central stance,” Bailey said, implies that the BoE will have to “lean a little harder” to keep inflation on track, leading to a slower rate cut than in the first scenario.
The BoE’s latest forecasts, published in November, focused on a medium-term outlook and were based on market expectations for four rate cuts over the next year. Swap markets are currently pricing in three rate cuts through the end of 2025.
The slowdown in price growth so far suggests that the UK’s inflation-targeting regime, based on central bank independence, has worked, Bailey said.
“(Inflation) has fallen faster than we thought. I mean, a year ago we were saying that inflation today would be about one percent higher than it actually is,” he said. “I think it’s a good test of the regime. The regime was never able to prevent these shocks.”
In its outlook, the OECD stressed the need for “prudent” fiscal policy, with the UK’s public debt seen as above 100 per cent and rising.
“With limited fiscal reserves, possible external shocks that would require fiscal support are a significant downside risk to the outlook,” the OECD outlook said, citing a fresh rise in global energy prices.
“Furthermore, persistent price pressures caused by strong increases in government spending and uncertainty about the degree of slack in the labor market could require the monetary stance to remain tighter for longer,” it added.
Data visualization by Clara Murray
