The Bank of England is expected to maintain interest rates at 5.25% for the sixth consecutive time on Thursday. This decision comes amidst persistently high inflation, which currently stands at 3.2%, exceeding the Bank’s 2% target.
Alongside the interest rate decision, the Bank will release its latest economic forecast, projecting future inflation and the UK economy’s trajectory. This report arrives amidst commitments from major political parties regarding their strategies for driving economic growth.
The UK’s economic health has been under scrutiny, particularly with an upcoming general election looming, where economic policies are likely to be a pivotal issue.
Prime Minister Rishi Sunak has expressed optimism about the economy’s recovery in 2024, but many households continue to face financial strain.
While economists anticipate the Bank maintaining current interest rates, there is speculation that rates may be cut for the first time in the summer. The Bank initially raised interest rates to curb rising consumer prices and alleviate the cost of living.
The theory behind raising interest rates to combat inflation is that increased borrowing costs prompt reduced spending, leading to decreased demand and subsequently easing price rises. However, maintaining high interest rates can adversely impact the economy by deterring business investments.
Inflation surged following the lifting of Covid-related restrictions, further exacerbated by increased energy and food prices following Russia’s invasion of Ukraine.
The Bank’s base interest rate influences rates set by commercial banks and lenders, affecting borrowing costs for mortgages and yielding higher returns for savers.
Emma Wall from Hargreaves Lansdown suggests that any deviation from maintaining rates would be unexpected, as Bank of England Governor Andrew Bailey has not indicated a change. However, she anticipates rate cuts in the near future, echoing similar moves by other central banks.
Fiona Eastwood from Merlin Entertainments emphasizes the importance of interest rate reductions amidst falling inflation, particularly for businesses in the hospitality and leisure sectors, which are still recovering from pandemic-related challenges.
Laith Khalaf from AJ Bell believes it is premature for the Bank to lower rates, especially given the cautious stance of the US Federal Reserve. While a rate cut may occur in the future, it is unlikely to lead to near-zero interest rates seen in the past.
The Bank expects inflation to dip slightly below the 2% target by summer, and Governor Bailey has suggested that achieving the target is not a prerequisite for rate cuts, but rather convincing evidence of future inflation trends.
Despite the UK’s recent economic downturn, policymakers are optimistic about recovery, with official figures expected to confirm growth in the first quarter of 2024.