Bank of England Expected to Maintain 15-Year High Rates Despite Signs of Slowdown, Reports Reuters

By William Schomberg

LONDON – The Bank of England is anticipated to maintain its borrowing costs at a 15-year peak during its upcoming meeting, indicating that it does not intend to lower them in the near future amid ongoing challenges with high inflation, which is notably the highest among developed economies.

Despite signs of economic strain that some interpret as the onset of a recession, the BoE is expected to keep the Bank Rate steady at 5.25% for a second consecutive meeting after a series of 14 rate increases, according to a recent poll of economists.

In a similar vein, last week the European Central Bank opted to keep rates unchanged, and the U.S. Federal Reserve made the same decision as they monitor whether the recent surge in inflation has truly subsided.

The BoE’s Monetary Policy Committee is contending with an inflation rate that exceeds the euro zone rate by more than twofold and is nearly double that of the United States. In September, the committee narrowly voted 5-4 to pause its rate hikes.

However, increasing evidence of a slowdown in various sectors of the British economy has emerged since then, prompting some economists to suggest that a recession may already be underway.

Mike Riddell, a senior portfolio manager at Allianz Global Investors, remarked that the delayed effects of rate changes imply that the monetary policy adjustments made between late 2021 and August this year have yet to be fully realized.

"The BoE is likely to remain cautious and observe the consequences of previous rate hikes before making further changes," Riddell stated.

Gradual Decline of Inflation

BoE Governor Andrew Bailey and other senior officials have recognized that their past rate increases are impacting the economy, yet they remain steadfast in their commitment to curtailing inflation.

The central bank has faced criticism from economists and politicians for not aggressively tackling the price surge earlier on. However, it has since reiterated its resolve to eliminate long-term inflation risks, particularly those associated with strong wage growth.

Although inflation has decreased from 11.1% just over a year ago to 6.7% recently, it still vastly surpasses the BoE’s target of 2%. The BoE’s last economic forecasts from August indicated that inflation may not return to the target level until the second quarter of 2025.

While inflation is expected to continue its downward trend in October following a stagnant September, surging oil and gas prices due to unrest in the Middle East may hinder its decline. The BoE is set to release its updated forecasts soon.

Many investors believe that the central bank has reached the end of its rate hike cycle and will keep borrowing costs stable until at least August of next year before beginning to reduce them. However, Bailey and his colleagues are likely to assert their readiness to raise rates further if required.

In addition to economic data, the BoE is also monitoring political developments, as Prime Minister Rishi Sunak faces pressure from within his Conservative Party to implement tax cuts ahead of a national election anticipated next year.

Sunak and his finance minister, Jeremy Hunt, have indicated that sweeping tax relief may not be feasible in the upcoming budget update on November 22, emphasizing the importance of focusing on reducing inflation. Sunak committed in January to halving inflation this year.

It is anticipated that Hunt will present one more budget statement in spring next year prior to the election.