Bank of England to hold interest rates this week after surprise rise in inflation
by Alex Daniel PA Business Reporter · ChronicleLiveThe Bank of England is anticipated to keep interest rates steady at its forthcoming policy decision this Thursday.
The outcome of the policymakers' meeting, set for December 19, is expected by most analysts to result in a vote to maintain the UK's base interest rate at 4.75%.
This base rate plays a crucial role in determining the cost of loans and mortgages charged by banks, and it has remained elevated in recent years as a measure to control soaring inflation.
Earlier in the year, inflation dipped below the Bank's 2% target, leading to rate cuts in August and November.
However, a surge to 2.3% in October, marking the steepest increase in two years, was reported last month. Despite the rise being anticipated due to escalating energy bills, the actual hike exceeded many forecasts.
This development has quelled any lingering expectations of an additional rate reduction before the year ends.
Analyst Michael Hewson said the rise serves as "an uncomfortable reminder that UK inflation always tends to be stickier than many would like".
Additionally, the Bank's approach is likely to be influenced by Labour's tax increases on businesses announced in the October Budget.
Chancellor Rachel Reeves raised the national insurance contributions (NICs) that businesses must pay, with the intention of funding enhanced Government services such as public transport and the NHS.
However, some specialists have cautioned that these tax hikes could have inflationary effects.
Andrew Bailey, the Bank’s governor, stated in early December that the impact of the NICs increase on the economy is still unclear, labelling it as the "biggest issue" post-Budget. Bailey has consistently advocated for a steady approach to reducing interest rates at previous meetings.
A slight fall in gross domestic product (GDP) in October presents a complication for policymakers, as higher interest rates typically hinder GDP growth. This contraction could sway some of the Bank’s nine members of the Monetary Policy Committee towards voting for a rate cut in December.
However, economists attribute the October GDP contraction to people adopting a wait-and-see attitude ahead of the Budget policy decisions at the month's end, predicting that growth will resume.
Thomas Pugh, an economist at consultancy RSM, believes it's unlikely the committee will deviate from its gradual approach.
"Ultimately, that means mortgage holders won’t be getting an early Christmas present from the BoE this year," he said.
"We expect four cuts in 2025, meaning rates will finish the year at around 3.75%, but the risks are weighted towards fewer rate cuts."
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