Most economists anticipate that interest rates will be left unchanged when the Bank of England's Monetary Policy Committee (MPC) announces its next decision later this week. This marks the first interest rate setting meeting of the year, following a rate cut delivered before Christmas, which was the fourth such reduction.
Inflation Rebound Complicates Policy Outlook
Official data has revealed that inflation unexpectedly rebounded in December, rising for the first time in five months. The Consumer Prices Index (CPI) inflation rate reached 3.4% for the month, an increase from 3.2% in November, with factors such as tobacco duties and airfares contributing to the upward pressure on prices.
This inflation uptick is likely to reinforce the MPC's inclination to keep rates steady this month. Philip Shaw, an analyst for Investec, stated: "The principal reason to hold off from easing again is that at 3.4% in December, inflation remains well above the 2% target."
Balancing Growth and Price Stability
Interest rates are widely expected to remain at 3.75% as Bank of England policymakers prioritise curbing above-target inflation while also monitoring economic growth, according to expert analysis. At the time of the December cut, Governor Andrew Bailey noted that the UK had "passed the recent peak in inflation and it has continued to fall", enabling the MPC to ease borrowing costs. However, he cautioned that any further cuts would be a "closer call".
Shaw added: "But with the stance of policy less restrictive than previously, there are greater risks that further easing is unwarranted." Shaw also highlighted other data points the MPC would consider, including gross domestic product (GDP), which saw a return to growth of 0.3% in November – a potentially encouraging sign for policymakers.
Expert Consensus on Rate Hold
Matt Swannell, chief economic advisor to the EY ITEM Club, affirmed: "Keeping bank rate unchanged at 3.75% at next week's meeting looks a near-certainty." He noted that while some MPC members who favoured a cut in December still have concerns about persistent wage growth and inflation, recent data has not been compelling enough to prompt back-to-back reductions.
Edward Allenby, senior economic advisor at Oxford Economics, forecasts the next rate cut to occur in April. He explained: "The MPC will continue to face a delicate balancing act between supporting growth and preventing inflation from becoming entrenched, with forthcoming data on pay settlements likely to play a decisive role in shaping the next policy move." The Bank's policymakers have consistently voiced concerns regarding the pace of wage increases in the UK, which can fuel overall inflation.
