The Bank of England is all but certain to keep interest rates at 5.25% this week, according to economists and City traders, but there is hope that the Monetary Policy Committee will signal that it is now thinking about cuts.
The Bank will announce its latest decision at noon on Thursday, but the outcome is seen as close to a foregone conclusion. City interest rate swap markets suggest that there is about a 98% chance that interest rates are held at the highest level since 2008.
Yet economists have predicted that this week could mark a turning point, as the Monetary Policy Committee’s language turns more ‘dovish’.
Following all of its past interest rate decisions in the current cycle, the Bank has said that “further tightening” may be required if it sees evidence of “more persistent inflationary pressures”.
But economists at Dutch bank ING say they expect Threadneedle Street to drop that line from its announcement this week.
Shaan Raithatha, senior economist and strategist at Vanguard, said Andrew Bailey and Co will likely ‘lay the groundwork’ for rate cuts at this meeting.
“We expect no change to UK monetary policy at the Bank of England’s (BoE) meeting on Thursday (1st February), keeping the Bank Rate at 5.25%,” Raithatha said. “But, given the large undershoot to the inflation forecast in recent months, we expect the tightening bias to be dropped and instead anticipate monetary policy committee members will lay the groundwork for rate cuts in the middle of the year. Starting to cut as early as the Spring seems too early in our view, given the persistence of core/services prices.”
Expectations that cuts are coming soon have fuelled a 'price war' this year among mortgage lenders. Many top lenders such as Halifax, Santander, NatWest and HSBC have cut the prices on fixed-rate deals, with some offering selected products at below 4%, in the expectation that the Bank will cut its base rate soon.
The Bank’s decision this week will be accompanied by its latest forecasts for the UK economy. Since the last forecast, the UK has seen a number of below-expectation inflation readings, though the most recent figure, for December, was ahead of projections. Those downside surprises mean that the Bank’s forecast for inflation through this year is likely to be more optimistic.
The last forecasts, published in November, predicted inflation to remain above the 2% target until late 2025. However, economists at the EY Item Club think that the new projections will show the rate of price rises returning to target in the first half of this year. If that’s the case, the Bank will likely turn to rate cuts soon.
Martin Beck, Chief Economic Advisor to the EY ITEM Club, says: “A change in the outlook for inflation since the MPC met last in December should prompt an adjustment in the Committee’s tone at its February meeting. In Q4, Consumer Price Index (CPI) inflation of 4.2% was well below the Bank of England’s November forecast, marking the second most substantial undershoot of an earlier projection in the last 20 years, and the conditioning assumptions used by the Bank of England in its forecast now appear too pessimistic.”
The decision comes amid fears that the Bank’s efforts to control inflation may have tipped the UK into recession last year. Official figures show the economy contracted in the third quarter of 2023, and if December’s figures are disappointing, then it may have done the same in the fourth quarter. Two consecutive quarters of decline is the ‘technical definition’ of a recession.
