In a note to analysts, Morgan Stanley said it expects the BoE to cut interest rates as soon as May and notes that the base rate could fall to 4.25 per cent by the end of next year.
Earlier this month, the BoE’s Monetary Policy Committee (MPC) held the base rate at 5.25 per cent for the second time in a row, after 14 consecutive hikes.
The forecast would provide some relief for mortgage borrowers and echoes comments made by the BoE chief economist late last week.
In an online question-and-answer session run by the BoE, Huw Pill hinted that the bate rate could start to fall by the middle of next year.
However, at the same time, he warned that interest rates are unlikely to return to the record low levels seen during the 2010s, saying that they would likely settle at a level “below where we are” but probably “higher than the interest rates that we had in the pre-Covid era”.
Inflation and base rate: Words of warning, differences of opinion
However, financial experts noted that today’s ONS job market figures could prove inflationary in the short term, leading the BoE’s MPC to consider further rises.
Danni Hewson, AJ Bell head of financial analysis, said: “The pace [of wage growth] has eased back ever so slightly from 7.8 per cent to 7.7 per cent, but it’s still historically high and will make for uncomfortable reading by MPC members when they next meet in December.
“When adjusted for inflation it means people are finally feeling the benefit in their pay packets and with inflation expected to have cooled significantly last month it is an indication that the worst of the cost-of-living squeeze might be over.
“But there lies the rub. If households are feeling more confident and have a bit more room in the budget they are likely to spend that cash, which could prove inflationary.”
However, Samuel Tombs, UK economist at Pantheon Macroeconomics noted that with wage growth slowing, the BoE may make its downward slice sooner rather than later.
He said: “In one line: Much slower wage growth is increasing the chances of a rate cut in H1 2024.”
Meanwhile, climate change and countries’ approaches to combating it are also likely to boost inflation and, therefore, potentially have a knock-on effect on interest rates, according to BoE policymaker Catherine Mann.
In a speech yesterday, the MPC member said: “The research here points to increased inflation, increased inflation persistence, and increased inflation volatility associated with climate shocks, policies, and spillovers.”
October’s inflation rate will be announced tomorrow, while the next meeting of the MPC and the final base rate decision of the year will be on 14 December.