What to expect from the Bank of England’s interest rate decision this week
The Bank of England is widely expected to hold its policy rate at 4%, bringing a halt to the quarterly cadence of rate cuts seen over the past year.
In a research note published this week, S&P Global said that recent policy meetings have seen rate setters split on whether the UK economy needs a rate cut to inject more stimulus to counter lacklustre economic growth and falling employment, or whether caution is needed as inflation (currently at 3.8%) continues to run well ahead of the Bank’s 2% target.
Recent PMI data sent mixed signals, showing slow but improving growth accompanied by cooler price pressures. And while consumer confidence has also picked up since the summer, there’s a great deal of uncertainty about the near-term outlook, both for business and households.
Most importantly, policymakers are likely to want to see how economic prospects change after the upcoming Budget, in which the government faces the juggling act of supporting economic growth while managing concerns over the deficit.
Markets are pricing in no rate cut from the Bank of England when its Monetary Policy Committee meets in the coming week, but policymakers are expected to retain an easing bias.
Although inflation is running hotter than target at 3.8%, there are signs that the inflationary impact from last year’s Budget is starting to ease (most recently via a fall in the UK flash PMI input price index to an 11-month low).
Furthermore, despite signs of business growth picking up in October, the pace of expansion remains sluggish. The upcoming Budget is also widely expected to see the government raise taxes, which has the potential to dampen economic growth further.
Chancellor Rachel Reeves says that the UK can defy gloomy economic forecasts, despite reports she is facing a £20 billion shortfall in her November budget.
Reeves said that her decisions at next month’s budget “don’t come for free and they are not easy”, but that she was determined to beat the forecasts.
“I’m going to be candid now that the productivity performance we inherited from the previous Conservative government and since the financial crisis has been too weak,” she wrote.
“Austerity, a chaotic Brexit, and the pandemic have left deep scars on the British economy that are still being felt today. But the task facing our country, facing me as chancellor, is not to relitigate the past or let past mistakes determine our future.
“I’m determined that we don’t simply accept the forecasts but we defy them, as we already have this year. To do so means taking the necessary choices today, including at the budget next month.”
