Bank of England expected to leave interest rates on hold despite falling inflation – business live
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It’s a busy day for central bankers, with the Bank of England expected to leave UK interest rates at a 16-year high at noon.
Despite inflation dropping to a two-and-a-half year low on Wednesday, economists predict BoE policymakers will choose to leave Bank Rate at its current level, 5.25%.
That would fail to bring any relief to UK borrowers, and maintain the pressure on the economy from higher borrowing costs.
According to the money markets this morning, ‘no change’ is a 95% while there’s just a 5% possibility of a quarter-point cut (lowering rates to 5%).
The Bank has been clear in recent weeks that it wants to see further evidence that inflationary pressures are falling'; economists will scrutinise the minutes of this week’s meeting for any hints as to how long policy should remain restrictive.
At last month’s meeting, the Bank’s nine policymakers split three ways – six voted to hold rate, two wanted a rise, and one a cut. That split could change today, as the monetary policy committee weighs up the risks of tightening for too long, versus easing too early.
The Bank will surely have appreciated yesterday’s drop in CPI inflation to 3.4%, neared to its 2% target. But it will also have noted that services inflation – a guide to domestic inflationary pressures – was 6.1%. That could be too high for comfort, for the BoE.
The MPC will also want to see signs that wage pressures are easing – as George Buckley, economist at Nomura, explains:
Annual rates of inflation are likely to fall further over the course of 2024, and pay settlements are running at a slower pace according to XpertHR data.
But calculations of price “momentum” suggest we’re not quite at the settling point we need to be for the annual rate of inflation to migrate all the way back to its target. The stronger services [inflation] print in particular provides some comfort for our view that the Bank will only cut rates from August this year, while weaker pay settlements raise the risk of an earlier move relative to our forecast.
Not cutting has its risks, though. Monetary policy operates with a lag – meaning interest rate changes are like turning the rudder on a supertanker, not the steering wheel of a racing car.
Last month, the Bank’s former chief economist, Andy Haldane, warned that keeping rates high could ‘crush the economy’
Haldane’s successor, Huw Pill, has likened the Bank’s challenge to a trip on Table Mountain. Rates may have reached their highest levels, but there’s more of a plateau to travel before they start falling….
The agenda
7am GMT: UK public finances
8am GMT: Taiwan’s interest rate decision
8.30am GMT: Switzerland’s interest rate decision
9am GMT: Norway’s interest rate decision
9am GMT: Eurozone ‘flash’ PMI survey of business activity for March
9.30am GMT: UK ‘flash’ PMI survey of business activity for March
Noon GMT: Bank of England interest rate decision
12.30pm GMT: US weekly jobless figures