The Bank of England is expected to hold interest rates at 4.75% on Thursday after a jump in inflation made a further cut less likely
The Bank of England is widely anticipated to keep interest rates steady at its upcoming policy meeting on Thursday.
The announcement, expected on December 19, will likely see policymakers voting to hold the UK’s base rate at 4.75%. This rate plays a crucial role in determining the cost of loans and mortgages, and has been maintained at a high level in recent years to combat soaring inflation.
Earlier this year, inflation dipped below the Bank’s 2% target, leading to rate cuts in August and November. However, a sharp rise to 2.3% in October – the most significant increase in two years – was reported last month.
This surge, driven by escalating energy bills, exceeded predictions and quashed any lingering expectations of an additional rate reduction before the year ends. Analyst Michael Hewson commented on the situation, saying the spike serves as “an uncomfortable reminder that UK inflation always tends to be stickier than many would like”. With Labour’s recent tax hikes on businesses following the October Budget, the Bank is expected to proceed with caution.
Chancellor Rachel Reeves raised national insurance contributions (NICs) for businesses to fund increased government spending on public services and the NHS. While these measures aim to enhance services, some specialists have cautioned that they might lead to inflationary pressures.
Andrew Bailey, the Bank’s governor, stated at the beginning of 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 maintained that the Bank will adopt a steady approach to reducing interest rates in previous meetings.
A slight fall in gross domestic product (GDP), the primary measure of economic growth, in October presents a complication for policymakers. Higher interest rates typically hinder GDP, suggesting that the 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 contraction in October’s GDP to people adopting a wait-and-see attitude ahead of the Budget policy decisions at the end of the month, 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.”