The Bank of England risks falling behind the curve on interest rate cuts and may be forced to “play catch-up” next year if it delays action as inflation continues to ease, according to an investment bank.
Kallum Pickering, chief economist at Peel Hunt, said inflation is likely to drift back towards the Bank’s 2% target over the course of next year, arguing that the worst of the inflation shock for the UK economy has probably passed. Consumer price inflation fell to 3.2% in November.
The Bank raised interest rates to a peak of 5.25% after inflation surged above 11% in 2022 in the wake of Russia’s invasion of Ukraine and the resulting energy crisis. Pickering believes policymakers should follow a rate cut in December with another reduction in February, citing a lack of economic growth since the summer and a labour market that is cooling rapidly.
He warned that, because monetary policy operates with a lag, waiting until inflation is back at 2% before easing policy risks deepening the economic slowdown rather than stabilising it. “The danger now is that the Bank of England keeps policy too tight for too long,” he said, which could undermine broader macroeconomic stability.
