GRAPHIC-Stumbling growth and stubborn inflation: the BoE's rate cut challenge

By William Schomberg, Sumanta Sen

LONDON, Jan 24 (Reuters) - The Bank of England must contend with a slowdown in Britain's economy but also stubborn inflation pressures when it considers whether to cut interest rates in early February as well as its message about the outlook for the rest of the year. Inflation is stuck above the BoE's 2% target and looks set to rise further while the economy has stagnated since the middle of 2024, offering conflicting signals for the central bank's rate-setters. The graphics below illustrate the challenge facing the BoE at a time when investors are on edge over high borrowing and what some see as "stagflation" in the economy against a backdrop of global uncertainty about U.S. President Donald Trump's plans. Investors are putting a roughly 80% chance of the BoE cutting its benchmark Bank Rate to 4.5% from 4.75% on Feb. 6, and a similar chance that there will be two further quarter-point reductions before the end of 2025.

INFLATION Britain's consumer price inflation rate has been above the BoE's 2% target every month since July 2021 with the exception of May, June and September 2024. The most recent reading of 2.5% is well below the four-decade peak of 11.1% in October 2022, after Russia's full-scale invasion of Ukraine. But the BoE expects it to rise this year and some private economists think it could hit 3% in data for January. Price growth for services, a key BoE gauge of future price pressures, fell sharply in December but remains too high to bring headline inflation back to target.

INFLATION EXPECTATIONS The BoE monitors expectations about future inflation which can embed price pressures into the economy, for example through higher wage demands. A survey conducted by Citi and polling firm YouGov showed expectations for inflation in five to 10 years' time rose to 3.9% in December from 3.6% in November and also increased for the year ahead. Citi said inflation expectations still seemed anchored but the latest survey was concerning.

WAGE GROWTH Employers have sped up the pace of raising pay for their staff in recent months despite signs of a slowdown in hiring, according to official data that offered little immediate relief for the BoE. A separate survey of businesses published by the central bank suggests pay growth pressure would come down in 2025 but only slowly.

PRICES AHEAD The BoE survey showed companies' intentions to raise prices over the coming year were higher in the three months to December than at any point since the three months to June. Over half of firms intended to raise prices to offset a 25 billion-pound increase in social security contributions announced by finance minister Rachel Reeves in her first budget in October.

GROWTH STAGNATION

Economic output has largely flatlined since the time of last July's election that brought the Labour Party to power, due at least in part to uncertainty about the new government's tax plans and then the social security hike in Reeves' budget. A survey of businesses published on Friday showed that the slow growth in private sector activity barely edged up at the start of 2025, corporate optimism contracted again and price growth remained strong. Forecasters including the BoE expect overall economic growth will pick up in 2025 but largely as a result of higher government spending.

HIRING AND INVESTMENT PLANS ARE WEAK Large British businesses intend to cut hiring this year at the fastest pace since the COVID-19 pandemic, according to a survey by Deloitte which linked the plans to the new government's increase in the corporate tax burden. Investment plans were the weakest in more than a year although Britain was more attractive for capital expenditure than the euro zone, the same survey showed.

(Writing by William Schomberg; graphics by Sumanta Sen; Editing by Toby Chopra)