On Thursday, the Bank of England is expected to keep interest rates at 5% after a new report reveals that inflation in the UK has remained at 2.2% over the past month. Though this figure is just above the Bank’s 2% target, Governor Andrew Bailey warns that there will be no swift fall in rates over the next few months. Economists and investors are not betting on any changes to interest rates on Thursday, and instead, anticipate that a rate cut will take place in November instead.
Chief UK economist at Pantheon Macroeconomics, Rob Wood, assures that the new inflation data “gives the Bank of England little reason to rush to cut interest rates again”. Susannah Streeter, Head of Money and Markets at investment firm Hargreaves Lansdown, suggests that the Bank will not opt to cut rates this month and instead will wait until November and December.
Interest rates dictate the cost of borrowing which includes mortgages, credit cards and the returns on savings. Although rates were recently cut in August 2022, the cost of borrowing remains high. Homeowners on fixed-rate mortgages are still going to face the prospect of significantly higher repayments when deals expire over the next few years.
The decision to cut rates in August was close with only five of the Bank’s nine-member committee voting for a quarter-point cut. Allan Monks, UK economist at investment bank JP Morgan, believes that the Bank will hold rates. Although the Bank has recently become more dovish, it’s requiring more data surprises to ease more quickly.
In recent years, rates have climbed as the Bank has tried to slow the pace of consumer price increases. When Covid lockdown restrictions were lifted, prices began to rise rapidly as the demand for goods increased. However, energy and food prices soared after Russia’s invasion of Ukraine, which pushed inflation to 11.1% in October 2022, the highest rate in 40 years. Increasing interest rates helps to combat inflation by making borrowing more expensive, which, in turn, reduces spending, lowering demand and price rises. However, it can be challenging to balance because high rates can damage the economy as businesses put off investing in production and jobs
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