The Bank of England (BoE) is widely expected to announce a reduction in the UK’s base interest rate later this week, following months of speculation over its monetary policy. The current base rate stands at 4.75%, and most senior economists predict a quarter-point reduction, bringing it to 4.5%. This move would continue a series of rate cuts initiated in the summer of 2024.
Interest rates play a crucial role in shaping the financial landscape of the UK. The base rate directly impacts the cost of borrowing, influencing everything from mortgages to personal loans, as well as savings account interest rates. In recent years, significant hikes in the base rate, designed to combat soaring inflation, have left borrowing costs considerably higher than they were for most of the past decade. At the peak of these hikes, the base rate reached 5.25% in late 2023 before being reduced to its current level of 4.75% over several months.
The last time the base rate was set at 4.5% was in May 2023. Now, with inflation coming down, many experts believe the Bank of England is poised to resume interest rate cuts to stimulate the economy. Inflation has significantly cooled from its highs in previous years, currently standing at 2.5% per year, well below the levels that prompted earlier rate hikes.
Despite this positive trend, UK economic growth remains stagnated, prompting further expectations for rate cuts to encourage increased consumer spending and economic activity. If the base rate were lowered to 4.5%, it would represent the lowest level in over 18 months, offering some relief to consumers facing high borrowing costs.
However, recent economic data has suggested that inflation could be creeping back up, which could pose a challenge for the Bank’s monetary policy. On Wednesday, a survey of companies in the service sector, ranging from retail businesses to financial firms, revealed that cost inflation had risen slightly in January. This uptick could signal a potential resurgence in inflation, albeit more gradual.
While economists believe the latest signs of rising inflation are unlikely to deter the Bank of England from cutting rates on Thursday, the central bank is expected to tread carefully in the coming months. As Chris Arcari, an analyst at financial services firm Hymans Robertson, noted, the Bank will have to “walk a tightrope” when it comes to future rate cuts. While the current economic environment appears to support a modest reduction, the BoE is likely to adopt a cautious stance when communicating its strategy for future cuts, particularly in light of potential inflationary pressures.
More Read
One contributing factor to the recent increase in cost inflation is the government’s October Budget, which saw Chancellor Rachel Reeves raise national insurance contributions for businesses. While the policy was aimed at generating more funding for public services, including the NHS, some companies have argued that the move has contributed to rising operational costs, which in turn could push inflation upwards.
Matthew Ryan, an analyst at financial firm Ebury, explained that with economic growth stagnating and inflation showing signs of a mild rebound, the Bank of England would have to carefully consider which risks are likely to dominate over the coming months. “The BoE will need to make a judgment call on whether the risk of rising inflation outweighs the potential benefits of stimulating the economy through rate cuts,” Ryan said.
The Bank’s upcoming decision is expected to be highly influential, not only for the economy but for households and businesses across the country. A rate cut would provide a much-needed boost for borrowers, but the BoE’s careful balancing act between fostering growth and managing inflation will continue to shape its decisions throughout 2024. As the situation develops, markets and analysts will be closely watching for any hints regarding future rate cuts in the upcoming meetings set for March and May.
