The Bank of England looks set to leave interest rates on hold for a second time in a row when it meets on Thursday as the central bank attempts to bring inflation down to target without tipping the economy into a recession.
Economists think a majority of the rate-setting Monetary Policy Committee (MPC) will back leaving the Bank Rate at 5.25 per cent despite inflation remaining well above the Bank’s two per cent target, at 6.7 per cent.
Recent comments from MPC members suggest that the Bank has grown increasingly confident that the rate hikes already undertaken have helped temper price rises.
Earlier this month Andrew Bailey, the Bank’s Governor, predicted a “noticeable drop” in the headline rate of inflation next month and suggested there will be “more evidence” of easing inflation by the end of the year.
While Huw Pill, the Bank’s chief economist, recently said he was “reasonably confident” that higher interest rates were “bearing down on inflation”.
Many of the indicators of inflationary persistence are moving in the right direction too, albeit slowly. Unemployment has increased faster than the Bank forecast back in August, while wage growth has eased from its peaks, although it remains at elevated levels.
Concerns over the accuracy of official unemployment data is likely to bolster arguments for caution too.
However, economists expect that at least three members of the MPC will back a 25 basis point hike.
Sanjay Raja, senior economist at Deutsche Bank, said the more hawkish members on the committee would have concerns around “strong wage growth, and still elevated near-term inflation expectations as a result of sticky CPI and the emergence of geopolitical risks.”
This week’s meeting follows a knife-edge decision in September, when the MPC backed a pause by the thinnest of margins.
Looking forward, Sandra Horsfield, an economist at Investec, predicted the Bank would “reiterate its plan to keep it at this elevated level for a prolonged period” in order to stamp out inflation. The Bank is also likely to stress that it would be willing to hike interest rates again if further evidence of inflationary persistence emerges.
The Bank’s decision will come the day after the US Federal Reserve makes its latest rate decision. Markets expect the federal funds rate to also be left on hold at between 5.25 per cent and 5.5 per cent.
Last week the European Central Bank brought its own run of 10 consecutive rate hikes to an end as central banks move to the next stage in their battle against inflation.