The Bank of England is likely to maintain interest rates this week, following a surge in inflation and uncertainty surrounding the economic impact of the Budget. Policymakers are predicted to keep rates at 4.75 per cent at their upcoming meeting on Thursday, having previously reduced them in August and November.
Despite inflation dipping below the BoE's two per cent target in September, recent official figures revealed it rebounded to 2.3 per cent in October. This increase, the most significant in two years, exceeded economists' expectations, primarily due to escalating energy bills, as reported by .
Rate-setters will be closely monitoring new data on unemployment and inflation released on Tuesday and Wednesday respectively before making their decisions. Economists anticipate inflation to have risen again to 2.7 per cent in November.
Analysts at AJ Bell commented: "Policymakers cannot rest easy," and "They may feel that a lot of hefty lifting has been done, given how close inflation is to the two per cent target."
They added: "Consumers, however, will continue to feel the aggregate increase in prices over time, and not monitor just the year-on-year change, as that is how their wallets and purses are truly affected."
Thomas Pugh, an economist at consultancy RSM, stated: "We expect four cuts in 2025, meaning rates will finish the year at around 3.75 per cent, but the risks are weighted towards fewer rate cuts."
The Bank of England (BoE) has indicated a cautious approach towards reducing interest rates, as it considers the potential inflationary impact of Labour's tax increases revealed in the Budget. Businesses have expressed concerns that increased labour costs due to tax hikes, including employers' national insurance contributions (NICs), will compel them to raise prices and cut jobs.
Earlier this month, BoE governor Andrew Bailey identified firms' response to higher NICs as the "biggest issue" post-Budget. Meanwhile, some members of the Monetary Policy Committee (MPC) may be inclined to vote for a rate cut following Friday's GDP data, which showed an unexpected contraction of 0.1 per cent in October.
Higher interest rates typically hinder GDP growth. However, economists anticipate a resurgence in growth, attributing October's dip to consumers and businesses adopting a wait-and-see attitude ahead of the Budget.
Sanjay Raja, chief º£½ÇÊÓƵ economist at Deutsche Bank, expects the final BoE decision of the year to be uneventful, predicting a unanimous vote for a hold by policymakers. He said: "We expect the forward guidance to remain broadly unchanged with the MPC reaffirming its message of gradual easing, while keeping rates sufficiently restrictive for sufficiently long to ensure that inflation sustain returns to the Bank’s two per cent mandate."
