UK businesses plan to ease pay and price increases over the next year, paving the way for interest rate cuts this summer. This trend was highlighted in the latest poll conducted by the Bank of England's decision-making committee.
According to the survey, companies intend to increase wages by 4.1 percent on average, down from April expectations of 4.6 percent. Likewise, prices charged by businesses, a leading indicator of future inflation expectations, are expected to rise by 3.8% over the next year, down from a previous forecast of 4.2%.
These figures indicate that companies believe that inflationary pressures are easing, which could lead to lower wage demands from workers. Data from the Office for National Statistics shows that wages have increased at an average rate of around 6 per cent over the past year.
The Bank of England is currently considering when to implement its first interest rate cut since March 2020, after a series of increases that took the key interest rate to 5.25%, the highest level in 16 years. The latest inflation data, which showed a decline to 2.3% in April compared to 3.2% in March, exceeded the bank’s expectations.
Although services inflation – a crucial measure of domestic inflation trends – fell slightly to 5.9% from 6%, it remained higher than expected. Inflation in this sector is closely monitored by the Bank for signs of underlying inflationary pressures within the economy.
Speculation among investors is that borrowing costs could be lowered over the summer, and perhaps as early as August, if additional data confirms a continued decline in price growth towards the bank's 2 per cent target. Recent data indicate that inflation in the services sector has slowed to its weakest pace in three years.
“The panel of policymakers joins a host of surveys in suggesting that tight monetary policy continues to weigh on inflation pressures,” noted Rob Wood, chief UK economist at Pantheon Macroeconomics. “The decline in inflation and employment difficulties, a significant decline on year Lastly, interest rate setters could gradually begin easing monetary policy soon. We expect the bank's Monetary Policy Committee to cut interest rates by 25 basis points in August and again in November.
The anticipation of these adjustments reflects growing confidence in the stability of the UK economy, providing the Bank of England scope to begin easing monetary policy in the coming months.