The UK’s base rate has been held at 5.25% since August last year as part of the central bank’s task to put a lid on unruly inflation.
The Bank of England’s upcoming decision on interest rates is teetering on a “knife-edge”, according to experts, as borrowers anxiously wait to see if costs will be reduced for the first time since the pandemic.
Economists are divided over whether the Bank’s policymakers will deem it the right moment to lower rates this Thursday. The UK’s base rate has remained at 5.25% since August of the previous year, as part of the central bank’s mission to control inflation. .If so, it would mark the first time that UK rates have been cut since the onset of the Covid-19 pandemic in March 2020.
However, with inflation meeting the Bank’s 2% target level for the past couple of months, there is growing optimism that rates can begin to be lowered, thus alleviating the burden on borrowers. James Smith, a developed market economist for ING, believes it will be a “close call”, but anticipates a majority of policymakers will vote for a 0.25 percentage point rate cut this Thursday.
He stated that services inflation which solely considers service-related industries such as hospitality and culture is currently the “guiding light for Bank of England policy right now”. “More recently, services inflation has been bolstered by a surge in hotel prices,” he noted, suggesting that the Bank might be less worried by the “highly volatile” nature of the data.
“The bottom line is that there is just about enough in the recent data to give the Bank confidence to start lowering rates,” Mr Smith concluded. Sanjay Raja, a senior economist for Deutsche Bank, also forecasted that rates will be slashed to 5%, but emphasised it will be a “delicate balance”.
He said: “With the bank rate held steady for the better part of a year now, risk management considerations may be shifting from having done ‘too little’ to ‘too much’,” he said. The economist anticipates that Andrew Bailey, the governor, will be among those on the Monetary Policy Committee (MPC) leaning towards a rate reduction.
Conversely, Oxford Economics’ chief UK economist Andrew Goodwin has expressed his belief that the MPC might maintain rates at 5.25% for another month. His reasoning includes the financial markets’ expectation of a September cut, suggesting the Bank might not want to catch investors off-guard.
“The MPC hasn’t gone against the market consensus since November 2021,” Mr Goodwin pointed out. “Though not completely beholden to markets, we think the MPC would prefer to take markets with them rather than take them by surprise, particularly if there is little urgency.”
Experts at Pantheon Macroeconomics agreed that policymakers will keep rates on hold in August but “signal they expect to cut rates in the coming months”. “The swing voters — Andrew Bailey, Clare Lombardelli and Sarah Breeden — have not spoken since the General Election, which could suggest they are not ready to take the plunge,” Pantheon’s economists said.
