The Bank of England is likely to leave interest rates unchanged this week following a rise in inflation and ongoing uncertainty surrounding the economic effects of the recent Budget. Policymakers are expected to maintain the base rate at 4.75 per cent during their meeting on Thursday, following previous rate cuts in August and November.
Although inflation had dipped below the Bank’s two per cent target in September, the most recent official figures showed a jump back up to 2.3 per cent in October. This marked the sharpest increase in inflation in two years and came in higher than economists had anticipated, primarily due to the rising costs of energy bills.
The Bank’s decision to keep rates on hold comes amid concerns about the broader economic picture, as the increase in inflation puts pressure on households and businesses. With the government’s fiscal policies still playing out, the Bank is likely to take a cautious approach to interest rates in the short term.
Experts are keeping a close eye on the impact of these inflationary pressures, particularly as energy prices remain volatile. The Bank of England’s next steps will depend on whether inflation continues to rise or stabilises in the coming months, as well as the wider economic implications of the Budget measures.
Rate-setters at the Bank of England will be closely monitoring fresh economic data over the coming days, with important figures on unemployment and inflation set to be released on Tuesday and Wednesday. These will be pivotal in guiding the decisions on whether to adjust interest rates, as the bank weighs its response to the ongoing economic challenges.
Economists are forecasting that inflation may have risen again in November, potentially reaching 2.7 per cent, up from 2.3 per cent in October. This increase would come despite previous efforts by the Bank of England to curb inflationary pressures. The rise in inflation, expected to be driven by factors such as increasing energy costs, signals that the fight to stabilise prices is far from over.
According to analysts at AJ Bell, policymakers will be cautious and aware that there is still work to be done. While the Bank may feel some sense of relief due to inflation getting closer to its target of two per cent, they cannot afford to rest easy. The impact of rising prices continues to be felt by consumers, who may not always track inflation on a year-on-year basis. As the analysts noted, it’s the ongoing and consistent increase in the cost of living that has the most tangible effect on people’s finances.
“Policymakers may feel that a lot of hefty lifting has been done, given how close inflation is to the two per cent target,” said the analysts. However, this doesn’t mean the public is immune to the effects. The general increase in prices across goods and services, from food to transport, is a continual drain on household budgets. Consumers feel the cumulative effect of these price hikes, which may not always be immediately reflected in inflation data but significantly impact their purchasing power.
With this in mind, the Bank of England’s decision-making process will need to take into account not only the target inflation rate but also the real-world experiences of consumers, who continue to face a higher cost of living. This balancing act will be crucial in determining whether interest rates remain unchanged, or whether further action is needed to bring inflation under control.
Thomas Pugh, an economist at consultancy RSM, has provided an outlook for interest rates, predicting that there will be four rate cuts in 2025. According to Pugh, this would result in rates ending the year at approximately 3.75 per cent. However, he also pointed out that the risks are skewed towards fewer rate cuts, highlighting the uncertainty surrounding the economic environment.
The Bank of England (BoE) has signalled that it will adopt a cautious approach to reducing interest rates. This caution stems from the need to assess the potential inflationary effects of Labour’s tax increases, which were revealed in the Budget. The BoE will carefully evaluate how these tax rises, particularly in employers’ national insurance contributions (NICs), could influence inflation and the broader economy.
Many businesses have expressed concerns that the higher labour costs resulting from these tax hikes will force them to either raise their prices or reduce their workforce. These actions could lead to a negative cycle of rising prices and job cuts, further complicating the economic outlook.
BoE governor Andrew Bailey has emphasised that the response of businesses to the higher NICs is one of the most significant challenges arising from the Budget. Bailey noted that this issue could have a far-reaching impact on both inflation and employment levels, making it a key consideration for the Bank’s future policy decisions. The BoE’s careful monitoring of these developments will be crucial as it navigates the delicate balance of managing inflation while supporting economic growth.
Some members of the Monetary Policy Committee (MPC) may feel inclined to support a rate cut following recent GDP data, which revealed an unexpected contraction of 0.1 per cent in October. This slight economic dip has raised concerns, as higher interest rates are known to weigh on GDP by slowing down economic activity.
Economists, however, remain optimistic that growth will rebound. October’s contraction has largely been attributed to a wait-and-see approach adopted by both consumers and businesses ahead of the Budget announcement, suggesting that the decline may be temporary rather than a sign of deeper economic issues.
Sanjay Raja, chief UK economist at Deutsche Bank, believes the upcoming Bank of England decision will likely lack drama. “We expect the final BoE decision of the year to be a dull affair,” he said, predicting a unanimous vote among policymakers to keep rates on hold.
Raja also anticipates that the Bank’s forward guidance will remain consistent. He expects the MPC to reaffirm its commitment to gradual easing while maintaining interest rates at restrictive levels for a sufficient period. This approach is aimed at ensuring inflation steadily returns to the Bank’s two per cent target, providing stability and confidence in the UK’s economic trajectory.
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