Yahoo Finance Bank of England expected to leave interest rates on hold after inflation jump
The Bank of England is widely expected to leave interest rates at a 15-year high of 5.25% for a fourth straight month when it meets on Thursday.
The BoE’s Policy Committee will announce its latest decision at noon tomorrow and markets are predicting a 98% chance that interest rates will be held at the highest level since 2008.
Inflation fears still linger
Officials at Threadneedle Street have cautioned that it is “too early” to talk about cutting interest rates but, despite a small uptick in December, UK inflation has come in much lower than predicted and now stands at 4%. In November 2022, it peaked at 11.1% amid surging energy prices.
Susannah Streeter, the head of money and markets at Hargreaves Lansdown, explained: “With inflation ticking back up in December, it’s likely to have quelled immediate urges from policymakers around the table for rate cuts any time soon.
“Given the ultra-cautious stance three of the nine members of the MPC have taken towards inflationary risks, having voted for a rate hike at the last meeting, the chances of a reduction in the base rate at this gathering look very slim indeed.”
The Bank will be watching other measures of underlying inflation, such as core inflation which strips out the impact of food and energy prices to make their decision.
When will interest rates come down?
Falling inflation has prompted a flurry of bets on rate cuts. Investors now believe the first rate cut will be in May, and are pricing in four rate cuts this year meaning that by the end of 2024, the interest rate would stand at 4%.
Shaan Raithatha, senior economist and strategist at Vanguard, said Andrew Bailey and Co will likely ‘lay the groundwork’ for rate cuts at this meeting.
“We expect no change to UK monetary policy at the Bank of England’s (BoE) meeting on Thursday (1st February), keeping the Bank Rate at 5.25%,” he said.
Read more: UK house prices rise in January as pressures on mortgage rates ease
“But, given the large undershoot to the inflation forecast in recent months, we expect the tightening bias to be dropped and instead anticipate monetary policy committee members will lay the groundwork for rate cuts in the middle of the year. Starting to cut as early as the Spring seems too early in our view, given the persistence of core/services prices,” he added.
Philip Shaw, chief economist at Investec, is not expecting any rate cuts until June, with this prediction putting rates at 4.5% by the end of the year.
Matthew Ryan, head of market strategy at Ebury also agreed that that interest rates will only come down in June but asked investors to play close attention on how the Bank will hint at next steps.
“We think another 6-3 vote is likely and will be particularly attentive to how the Bank handles communications around the possibility of further hikes and prospects for rate reductions,” he said.
“All in all, we think the Bank has valid reasons to lag behind its major peers in cutting rates this year and see the June MPC meeting as the earliest date for the beginning of its rate cut cycle,” he added.
The Bank of England is expected to be slower at cutting interest rates than its peers. The Fed is expected to make five equivalent rate cuts and the European Central Bank is predicted to make six before the end of the year.
When will the Fed and ECB cut rates?
The Federal Reserve will decide on interest rates this Wednesday, with investors convinced that rates in the US will be left on hold too. But investors will be looking for any clues about when cuts could begin.
"This is the slow turning of the battleship of guidance where they slowly start to talk about rate cuts," said Luke Tilley, chief economist for Wilmington Trust.
The question of whether cuts will happen in March or May is currently the subject of intense debate on Wall Street as markets hang near record heights.
Read more: UK business confidence rises to highest level in two years
It is a similar tale in Europe, following last week’s decision from the European Central Bank (ECB) to leave interest rates unchanged at record highs of 4% for a third consecutive meeting.
At a press conference, ECB president Christine Lagarde said: "The consensus around the table of the governing council was that it was premature to discuss rate cuts.”
The Bank of England will have the opportunity on Thursday to explain more of its thinking than normal. It is releasing its quarterly assessment of the state of the UK economy, and forecasts for inflation.
Some economists predict the Bank will move forward its projection for inflation falling to 2% to the middle of this year, rather than in 2025.
Watch: Bailey: Bank of England still has more to do
Download the Yahoo Finance app, available for Apple and Android.
