Bank of England set to keep rates at 15-year high despite slowdown signs

LONDON, Nov 2 (Reuters) – The Bank of England appeared on Thursday to keep borrowing costs at a 15-year high and signaled it has no plans to cut them anytime soon as it remains locked in a battle against the highest inflation among the rich economies of the world.

Despite the tension in the economy, which some see as a sign of an emerging recession, the BoE is expected to keep bank rates at 5.25% for the second time in a row after fourteen consecutive increases, a Reuters poll shows among economists last year. week.

Last week the European Central Bank kept interest rates unchanged and the US Federal Reserve did the same on Wednesday, pending whether the worst inflation outbreak in decades has really been suppressed.

The BoE’s Monetary Policy Committee faces inflation that is more than double that of the Eurozone and almost twice that of the US. The country voted in September by only a narrow 5-4 margin to halt the series of increases in borrowing costs.

But signs of a slowdown in much of the UK economy have since become clearer and some economists say a recession may already be on the way.

Mike Riddell, senior portfolio manager at Allianz Global Investors, said the long delays between rate changes and their impact meant that most of the increases in the BoE’s borrowing costs were still being felt between late 2021 and August this year.

“The BoE will therefore most likely want to keep all options open, but appears willing to wait and observe how much pain the previous rate hikes have caused before changing rates again in either direction,” Riddell said.

SLOW DECLINE IN INFLATION

BoE Governor Andrew Bailey and other top central bank officials have acknowledged that their rate hikes so far are weighing on the economy. But they have also emphasized that they will not waver in their task to reduce inflation.

The BoE – which has been criticized by some economists and politicians for not sounding aggressive enough to suppress price rises early on – has said it is committed to eliminating long-term inflation risks to the economy, chief among them strong increases in wage growth.

Although inflation has fallen from 11.1% just over a year ago to 6.7% according to the latest data, it remains more than three times the BoE’s 2% target.

The central bank said in August in its latest set of economic forecasts that inflation would return only to 2% in the second quarter of 2025.

Inflation is expected to fall again in October after stalling in September, but rising oil and gas prices since the start of unrest in the Middle East could slow the decline.

The BoE will publish new forecasts on Thursday.

Most investors believe that rate hikes are now over and they will hold on to borrowing costs at least until August next year before cutting.

But Bailey and his MPC colleagues are likely to reiterate their willingness to raise rates further if necessary.

In addition to the figures, the BoE also monitors political news: Prime Minister Rishi Sunak is under pressure from his Conservative Party to cut taxes in the run-up to national elections expected next year.

Sunak and his Chancellor of the Exchequer Jeremy Hunt have said they cannot offer voters any big sweethearts in a budget update on November 22, given the need to focus on cutting inflation. Sunak promised in January to halve inflation this year.

But Hunt will likely have to submit another budget statement in the spring of next year, before the election.

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