UK: paving the way for BoE easing

We maintain our forecast of 0% GDP growth in the UK in 2024, although we see the balance of risks as skewed to the upside for the first time in several years. There is a chance that moderate growth in H1 is followed by a marginal acceleration in H2 that could extend into 2025.

Tailwinds include the diminishing impact of energy shocks and previous monetary tightening as well as an improvement in business activity indexes. However, adverse shocks on the supply side continue to act as a major structural brake on the UK economy.

The 2024 Spring budget delivered a new set of fiscal measures, including a 2 percentage point (pp) cut in National Insurance contributions, to support short-term economic growth. The Spring budget also included key measures aimed at fostering positive long-term growth. But with a debt-to-GDP ratio that has risen to over 100% of GDP, the room for additional fiscal easing is limited.

Assuming that wage growth has peaked, we continue to forecast average UK inflation of 2.6% in 2024, down from 7.3% in 2023, with core inflation anticipated to ease more slowly than headline due to persistent services inflation. Nevertheless, thanks to falling inflation overall, our central forecast remains that the Bank of England (BoE) will start to cut rates in June, with total easing of 100bp this year bringing the Bank rate down to 4.25%. However, depending on upcoming inflation and wage data, there is a possibility that the BoE may wait until August.

Once the rate cuts begin, the BoE will have some room to manoeuvre given a relatively high starting point, with the easing cycle likely to extend into 2025. At the same time, persistent inflation in the US (as borne out by the consumer price index for March) means there is a risk that the BoE’s initial leeway is limited by a more hawkish Federal Reserve.