Bank of England expected to wait for more evidence that inflation is under control before rate cut
LONDON: The Bank of England is anticipated to keep interest rates at a 16-year high of 5.25% on Thursday, but a reduction wouldn't be a significant surprise as inflation drops from multi-decade peaks.
The consensus in financial markets is that the majority of the bank's nine-member Monetary Policy Committee will refrain from voting for a cut — similar to the US Federal Reserve last week — and will await further evidence of receding inflation.
Headline inflation in the UK has decreased to an annual rate of 3.2%, its lowest level in two and a half years, but it still exceeds the bank's 2% target.
Economists speculate that inflation fell further in April, possibly below 2%, due to significantly lower domestic energy bills, which could encourage some rate-setters to vote for a cut. At the last policy-making meeting, only one member voted for a cut.
Economists believe that policymakers, still worried about persistently high levels of wage growth and higher prices in the crucial services sector, will wait until the summer before endorsing a rate cut.
Philip Shaw, chief economist at Investec, stated that the trend on the committee is clear and that a second member will transition to the "easing camp" and vote for a cut.
"However, it seems unlikely that they are ready to bite the bullet just yet," he added.
Like the US Fed and other central banks worldwide, the Bank of England aggressively raised interest rates in late 2021 from near zero to counter price increases initially fuelled by supply chain issues during the coronavirus pandemic and then by Russia's invasion of Ukraine.
Higher interest rates — which temper the economy by making borrowing more expensive — have helped alleviate inflation, but they've also burdened the British economy, which is barely growing.
The UK's governing Conservative Party, which appears to be heading for a significant electoral defeat later this year to the main opposition Labour Party, is hoping that interest rates will start to decrease soon, easing the pressure on financially strained households and thereby helping to stimulate an economic feel-good factor.
