Financial markets think we’ll get barely three more cuts in 2025. So far, the BoE has done little to persuade investors otherwise. From the little communication we’ve had from officials over recent weeks, it seems broadly happy with a base case that sees rate cuts continue once per quarter over the next year.
Above all, that more cautious approach is borne out of services inflation data that still looks unhelpfully sticky. We agree with the Bank’s forecast for this to bounce around 5% over the winter months. Pre-Covid, services inflation typically averaged out at 2.5%. Some of this recent stickiness is a legacy of tightness in the labour market that has contributed to equally stubborn private sector wage growth.
Those services inflation numbers also aren't quite as bad once volatile/less relevant items are excluded. Our measure of core services, which takes out things like travel, rents and hotels (all of which the Bank of England has said it pays less attention to) has fallen back more noticeably this year and now stands at 4.5%. By the second quarter, we think this core measure will be at around 3%. If we’re right, that would be a lot more palatable to Bank officials and may well be the catalyst for rate cuts to accelerate.
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