By Chris Dorrell
The Bank of England will likely leave interest rates on hold for the fourth time in a row when it meets on Thursday this week, economists have said, as the UK economy teeters on the brink of recession.
This would mean interest rates remain at 5.25 per cent having been raised from just 0.1 per cent at the end of 2021.
Despite a slight uptick in December, when the headline rate of inflation came in at four per cent, inflation in the UK has generally come in much lower than predicted by the Bank over the last few months. In its November round of forecasts, the Bank predicted inflation would be 4.6 per cent by the end of 2023.
At the Bank’s last meeting in December, six members of the nine-strong Monetary Policy Committee (MPC) voted to keep rates on hold with three backing another hike.
But inflationary pressures have gradually eased since then while growth has slowed, with many economists suggesting that the UK economy slipped into a shallow recession at the end of last year. Services inflation and wage growth, both of which the Bank have flagged as indicators of domestically generated inflation, have also come in below the Bank’s forecasts.
Officials at the Bank have so far cautioned that it is “too early” to talk about cutting rates, a position also taken by policymakers at the European Central Bank (ECB) last week.
But the progress on inflation has prompted markets to ramp up bets that the Bank will start lowering interest rates in the first half of the year. By the end of 2024, markets think the Bank Rate will stand at four per cent.
Although the Bank is unlikely to cut rates as fast as markets hope, most experts think rate-setters will drop any mention of hiking rates further.
The Bank has a “difficult needle to thread,” analysts at BNP Paribas said. “The MPC will want to change tack and deliver a more dovish tone but stop short of signalling rate cuts or endorsing current market pricing,” they said.
Philip Shaw, chief economist at Investec, agreed. “The Governor may well push back against the degree of market expectations of lower rates, while at the same time acknowledging decent progress on lowering inflation,” Shaw said.
Looking forward, the Bank’s latest round of forecasts, also published on Thursday, will likely reflect a number of positive trends which should paint a rosier picture for the UK economy.
Despite concerns the Red Sea crisis could push inflation higher, gas prices are running 25 per cent below the MPC’s November assumption while oil prices are down around five per cent too. Sterling meanwhile is trading around two per cent higher than at the time of the last forecast, which should ease import costs.
Sanjay Raja, UK economist at Deutsche Bank, suggested that these changes could help headline inflation return to target around 18 months earlier than the Bank had forecast back in November.
The Federal Reserve will also decide on interest rates on Wednesday, with investors convinced that rates in the US will be left on hold too.
