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The Bank of England now anticipates that inflation will decline more rapidly than previously forecasted, dropping below the central bank’s 2 per cent target for a sustained period.
This projection implies a need for interest rates to decrease at a faster pace than what financial markets have currently priced in.
According to the latest forecasts by the Bank, inflation is expected to reach 1.9 per cent in two years and 1.6 per cent in three years, reflecting a quicker decline than previously anticipated. The monetary policy committee highlighted that inflation persistence in the UK economy is expected to diminish at a slightly faster rate than previously assumed, although concerns persist about elevated services and wage inflation, which remain at 6 per cent.
The revision in inflation projections indicates that financial markets may have underestimated the necessity for rate reductions by the Bank of England in the coming years. Market expectations for interest rates have declined by 0.7 percentage points since February, prompting the Bank to adjust its inflation forecasts accordingly.
Analysts suggest that the Bank may need to commence rate cuts as early as August to align with the new inflation projections. Governor Andrew Bailey emphasized the likelihood of rate cuts in the upcoming quarters to make monetary policy less restrictive, potentially beyond what is currently reflected in market rates.
Despite the downward revisions in inflation, the Bank’s forecasts indicate an upward revision in economic growth projections. The UK economy is now forecasted to expand by 0.5 per cent this year, up from the previous forecast of 0.25 per cent, with growth expected to reach 1 per cent next year. Additionally, unemployment is expected to rise to 4.9 per cent from the current level of 4.2 per cent, while earnings are projected to increase by 5.25 per cent on average this year, representing an upgrade from the previous forecast of 4 per cent.
