Bank of England Set to Maintain Interest Rates at 3.75%
The Bank of England is widely anticipated to hold interest rates steady at 3.75 per cent this week, as policymakers navigate a complex balancing act between curbing inflation and fostering economic growth. Most economists predict the Monetary Policy Committee (MPC) will opt to leave rates unchanged at its upcoming decision on Thursday, reflecting a cautious approach in the face of recent economic data.
Inflation Rebound Complicates Policy Decisions
Official figures revealed that inflation experienced an unexpected rebound in December, rising for the first time in five months. The Consumer Prices Index (CPI) inflation rate climbed to 3.4 per cent for the month, up from 3.2 per cent in November. This increase was driven by factors such as tobacco duties and airfares, presenting a new challenge for the MPC.
This development follows the Bank's decision before Christmas to cut borrowing costs from four per cent to 3.75 per cent, marking the fourth reduction of the year. At that time, Governor Andrew Bailey noted that the UK had "passed the recent peak in inflation", but he cautioned that further cuts would be a "closer call".
Economists Weigh In on Rate Hold Expectations
Laith Khalaf, head of investment analysis for AJ Bell, commented: "It's extremely unlikely the Bank of England is going to do anything but hold interest rates where they are at its February meeting. The Bank reduced rates in December and has clearly indicated it wants to adjust policy gradually, so consecutive cuts are pretty much unthinkable in the current economic environment."
He added that while the Bank will likely look through one-off factors pushing up prices in December, there remain "lingering inflation fears" within the committee.
Key Economic Indicators Under Scrutiny
Economists have highlighted several datasets that the MPC will be monitoring closely:
- Gross Domestic Product (GDP): Returned to growth in November at 0.3 per cent.
- Wage Growth: Has continued to slow, according to latest official data.
- Unemployment: Remained at its highest level for nearly five years.
The cooling labour market provides encouraging news for policymakers as it suggests some inflationary pressures are easing. However, there is also caution about potential weakening of economic growth.
Expert Analysis and Future Projections
Edward Allenby, senior economic adviser at Oxford Economics, stated: "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." Mr Allenby forecasts the next rate cut to occur in April.
Matt Swannell, chief economic advisor to the EY Item Club, echoed this sentiment, describing a rate hold as a "near certainty". He noted: "Some of the MPC doves that favoured a cut in December still harbour some concerns around sticky wage growth and inflation." Mr Swannell also agreed that April represents the "most likely time for the next rate cut", as by then the MPC will have clearer insights into 2026 pay awards and whether further economic slack is emerging.
