BENGALURU, Jan 15 (Reuters) - Economists surveyed by Reuters stated that the Bank of England is expected to reduce interest rates four times this year in order to support a stagnant economy. However, they mentioned that there are potential risks of inflation increasing, which could lead policymakers to implement fewer rate cuts.
While interest rate futures are currently pricing in only two rate reductions for this year, recent disruptions in global bond markets have heightened concerns about rising inflation related to the economic policies of U.S. President-elect Donald Trump.
Although British inflation and essential indicators of price growth monitored by the BoE declined significantly last month, signaling room for further rate cuts, the Federal Reserve may have only one cut left in its agenda.
Even though interest rate futures are indicating just two 25 basis point rate cuts from the Bank of England this year, a majority of economists polled from Jan. 10-15, 38 out of 63, anticipate four quarter-point cuts, which would bring the Bank Rate to 3.75%. This forecast remains unchanged from the previous month.
In the current survey, all 65 economists expect the central bank to reduce the Bank Rate by a quarter of a percentage point on Feb. 6. However, despite this consensus on the short-term outlook, some economists express doubts about the Bank of England's capacity to deliver the expected rate cuts, mirroring recent cautious statements from policymakers themselves.
"With underlying inflation already high, and various survey-based inflation expectations on the rise, the Bank of England is likely to proceed cautiously," noted economists at JP Morgan.
Although most of the economists predict higher inflation than their forecasts for the UK this year, only two out of 25 respondents believe inflation will be lower. Forecasts suggest that consumer price index (CPI) inflation will average 2.5% this year and 2.1% next year.
Recent declines in the value of the pound and UK government bonds, along with U.S. Treasuries, have complicated the situation, pushing the yield on the 10-year gilt to its highest level since 2008.
"The rise in yields is primarily driven by global factors," emphasized Michael Saunders, senior advisor at Oxford Economics and former member of the Bank of England Monetary Policy Committee.
However, Saunders's statement highlighted that if domestic fiscal concerns introduce a risk premium on UK assets, the MPC might need to maintain a higher Bank Rate to counter the inflationary effects of a weaker pound. Yet, Saunders sees this as a risk rather than a likely scenario.
The UK economy experienced minimal growth in the latter half of last year and is forecasted to expand by just 0.9% in 2024, with an average growth rate of 1.3% this year and 1.5% next year.
(Other stories from the Reuters global economic poll)