© Reuters. FILE PHOTO: Rows of houses lie in front of the Canary Wharf skyline in London, Britain, March 19, 2023. REUTERS/Henry Nicholls/File Photo
(Reuters) -Citigroup said it expects the Bank of England (BoE) to start lowering interest rates this year, with the first cut expected in June, compared to a prior expectation of cuts beginning in August.
“A combination of stubbornly weak activity, a further softening in labour market indicators, alongside in-line wage and services inflation numbers will now more likely than not push the MPC (Monetary Policy Committee) to begin cutting by the end of Q2,” Citi economists said in a note dated March 12.
The Wall Street brokerage maintained the quantum of reductions at 125 basis points (bps) for the year, but did not mention how many rate cuts it expects the BoE to deliver in 2024.
Official data on Tuesday showed British wages, excluding bonuses, grew at their slowest pace in the final quarter of 2023, since October 2022, while the unemployment rate edged up unexpectedly, likely easing the central bank’s inflation worries.
Citi economists said wage growth seems broadly in-line with the BoE’s expectations for the private sector, while service sector inflation is expected to fall short of the central bank’s expectation by 10-20 bps over the next two releases, before it potentially starts cutting rates in June.
The brokerage added that an August cut, however, remains “plausible if inflation data for the second quarter prove more resilient”.
The BoE said it expects falling energy prices to push inflation back to its 2% target in the second quarter before rising services prices and wage costs lift inflation towards 3% later this year.
“The big picture of UK remains as one of large supply shocks, fading inflationary second round effects, accelerating monetary transmission, weak growth and fading fiscal stimulus” implying a softening labor market, Citi said.
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