Rate cuts will be smaller than you think, says Bank of England official

Bets on interest rate cuts this summer are too optimistic, according to a senior Bank of England official.

Catherine Mann, who voted to hold borrowing costs at 5.25pc last week, said investors had become “complacent” about the prospect of falling interest rates.

Ms Mann said she was concerned that expectations about a “substantial easing” had gone too far.

Traders have priced in three interest rate cuts by the end of the year to take the base rate to 4.5pc, which Andrew Bailey described last week as “reasonable”.

In an apparent split with the Governor, Ms Mann told Bloomberg TV: “I think they’re pricing in too many cuts”.

The US economist noted that bets on lower rates had already paved the way for a wave of cheaper mortgage deals “and so in some sense, I don’t have to cut”.

Ms Mann added: “I think that there has been a substantial easing [in interest rate expectations] even since the vote last week. And I think that perhaps markets are a bit too complacent about how long they think overall the Monetary Policy Committee will hold rates.”

Investors have ramped up bets on cuts since the Bank’s most recent interest rate-setting meeting, with markets now predicting that rates will fall to 4.25pc by early 2025.

Ms Mann also suggested that the Bank of England would be unlikely to reduce borrowing costs before the US Federal Reserve or European Central Bank. The Monetary Policy Committee (MPC) member noted that “wage dynamics in the UK are stronger and more persistent” than in either the US or eurozone, while services prices are also “stickier”.

She added: “On that basis, it’s hard to argue that the Bank would be ahead of the other two regions, particularly the United States.”

Inflation slowed to 3.4pc in February, from 4pc in January. However, it remains higher than the US or Europe. Services inflation in the UK also remains high at 6.1pc

Up until March’s MPC meeting, Ms Mann had called for rates to rise to 5.5pc for five months in a row. Describing why she decided to change her vote, the economist said there had been a notable shift both in consumer spending and the jobs market.

Ms Mann said that people were cutting back on discretionary spending on hotels, restaurants, entertainment and travel, owing to higher costs.

She said: “Basically firms have to respond to consumers saying: ‘I’m not going to pay that much’. And I do see that coming through on the data for these discretionary services.”

Ms Mann said she expected pay growth to cool in the coming months because companies were becoming less willing to take on staff, adding that steps taken by Jeremy Hunt in the Budget to cut National Insurance would also add to labour supply.

She said: “What we found is that households wanted to respond to the cost-of-living crisis by adding additional hours. Maybe a second job. And firms were willing to go along with that six months ago.

“But where we are now is that firms actually are saying: ‘because my wage bill is pretty high, what I want to do is cut hours’. So there’s a disconnect between what firms want and what households would like to have in terms of labour supply.”