London: The Bank of England is widely expected to cut interest rates for the third time in six months later Thursday, even though inflation remains above its target.
Most economists think the nine-member Monetary Policy Committee will lower the bank’s main interest rate by a quarter of a percentage point to 4.50 per cent, taking it to its lowest level since mid-2023. The base rate helps dictate how expensive it is for individuals to take out a mortgage or a loan, while also influencing the returns offered by banks on savings.
Of particular interest to financial markets is what the bank’s accompanying economic forecasts show and the tone of Gov. Andrew Bailey in his ensuing press briefing.
“Until now, the bank has cut at alternate meetings, but a stagnating economy and declining employment argue for more urgent action,” said Andrew Wishart, senior UK economist at Berenberg Bank.
The rate-setting panel is tasked with ensuring that inflation, as measured by the consumer prices index, hits a 2 per cent target over the coming couple of years or so.
Though inflation is standing at 2.5 per cent and expected to rise in coming months, partly as a result of business tax increases from the new Labour government, most economists think it will then trend lower towards the target, hence the panel’s ability to cut.
Official figures earlier this month showed a surprise decline in the inflation rate to 2.5 per cent in the year to December, largely as a result of easing price pressures in the services sector, which accounts for around 80 per cent of the UK economy.
Another potential reason for rate-setters to cut borrowing rates is that economic growth in the UK has stagnated, which will likely put downward pressure on inflation.
Inflation is way down from levels seen a couple of years ago, partly because central banks dramatically increased borrowing costs from near zero during the coronavirus pandemic. Prices then started to shoot up, first as a result of supply chain issues and later because of Russia’s full-scale invasion of Ukraine, which pushed up energy costs.
As inflation rates have fallen from multidecade highs, central banks, including the US Federal Reserve have started cutting interest rates, though few, if any, economists think that rates will fall back to the super-low levels that persisted in the years after the global financial crisis of 2008-2009 and during the pandemic.
AP
