The Bank of England is facing a knife-edge decision as rates rise but risks grow
The Bank of England is gearing up for a well-prepared vote on interest rates next Thursday, as policymakers weigh lower interest rates in the fight against future tax hikes following the upcoming tax hike.
Markets, which only in the past weeks expected no change in prices until the middle of 2025, are now expected. Investors are betting that the monetary policy committee (MPC) – the bank’s nine rate-setting panel – could vote less instead of a 0.25 basis point cut, reducing the base rate to 3.75 percent, the lowest in three years.
If approved, it would mark the bank’s sixth rate cut since August 2024 and would mark the US Federal Reserve’s latest decision to cut policy for the second time in a row.
The possibility of a rate cut is imminent following a run of soft economic data. Inflation, while still above the target of 3.8 percent, has remained below the bank’s forecast for three months in a row. The decline in services – a key indicator of home price pressures – increased to 4 percent.
The growth of food prices decreased by 4.5 percent, while the growth of private consumption was checked by 4.4 percent. Unemployment, there, rose to a four-year high of 4.8 percent, signaling slack in the labor market.
UK Government yields have fallen to their lowest levels this year as traders increasingly expect a rate cut before the end of the year. “Fears of prominent inflationary pressures have given way to concerns about a rapid cooling of the labor market and an overly restrictive monetary policy,” analysts at Bnp Paribas noted.
Investment banks are divided over whether the MPC will act this month or wait for clearer financial signals. Goldman Sachs and Nomura are predicting a narrow positive vote next Thursday, while Deutsche Bank believes the committee will err on the side of caution and hold rates tight.
Sanjay Raja, Deutsche Bank’s Chief Economist, said the MPC was “well balanced” but could decide to delay action until the Chancellor’s budget. Rachel Reeves is expected to announce a tax increase of up to $40 billion, which analysts warn could slow economic growth and strengthen the case for spending cuts later in the year.
Intermec economists urged restraint, suggesting the MPC should “wait for another batch of inflation data” before acting. However, Goldman Sachs said the Bank should move ahead to use the “critical momentum” expected in future monetary tightening.
Alongside next week’s decision, the bank will release updated forecasts for growth, inflation, unemployment and productivity. This will be closely watched amid reports that the Office for Budget Control is planning to reduce its productivity outlook, potentially leaving a £20 billion hole in the chancellor’s financial strategy.
Analysts at Pantheon Macroeconomics say that the increase in the tax rate is important ” [Bank] According to the cuts in December and again in the spring as “two consequences of high taxes and inflation.
A well-balanced decision puts the UK at a Crossroads: Whether to step in with the US Federal Reserve’s Ease Cycle or pause until the full impact of the budget becomes clear. Either way, next week’s vote will be one of the most watched in years – setting the tone for monetary policy into 2025.
