UK economy is now displaying solid momentum: Allianz Trade

The UK economy is picking up momentum from a weak 2023. This acceleration reflects catch-up effects and is being buoyed up by looser financial conditions, despite still elevated interest rates. Financial institutions are loosening their credit standards in anticipation of further Bank of England (BoE) rate cuts.

That is according to analysis by Allianz Trade published ahead of the UK budget due October 30. Earlier this year, it predicted the BoE would gradually reduce interest rates through 2024 and into 2025 to a terminal base rate of 3.25 percent. It now predicts that will fall further to a terminal rate of 3 percent by August 2025, delivering cautious 25bps rate cuts in each meeting from November 2024.

The report noted that the backdrop of inflation has improved. While it should pick back up slightly by the end of 2024 for technical reasons, underlying price pressures are easing. This will allow the BoE to accelerate the pace of rate cuts heading into 2025. Nevertheless, where interest rates settle will be at a level way above the pre-COVID-19 pandemic level, Allianz Trade suggested.

“The BoE is expected to move in lockstep with the Fed.”

It said it expects fiscal policy to be broadly neutral in 2025, but to support moderate growth through higher public investment. Nevertheless, UK public finances are weak and fiscal policy will start to tighten again from 2026.

Maxime Darmet, senior economist for the UK, US and France at Allianz Trade, said: “With an economy displaying solid momentum, inflation set to pick up again in coming months, and financial conditions loosening in areas such as the housing market, the BoE is in no rush to loosen policy.

“The BoE is expected to move in lockstep with the Fed, delivering cautious 25bps rate cuts in each meeting from November. A steady loosening from the Fed and the European Central Bank and a drop back in inflation expected by the spring of 2025 should give the BoE enough confidence to cut rates by 25bps in each meeting through August 2025.”

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