The Monetary Policy Committee (MPC) will meet today to determine whether the Bank of England Base Rate will rise, fall, or remain the same.
In November, the MPC cut the Base Rate to 4.75% from 5%, marking the second reduction of the year. However, with inflation on the rise again, expectations are that the Bank of England will hold off on further cuts this week.
Official figures released on Wednesday showed that inflation in the UK rose to its highest level in eight months in November. Consumer prices increased by 2.6% year-on-year, up from 2.3% the previous month. The rise was driven by high inflation in services, which makes up about 80% of the economy, and a jump in fuel prices.
This increase pushes inflation further from the Bank of England’s 2% target, reinforcing market expectations that the Bank will keep the Base Rate steady at 4.75% after today’s meeting.
Julian Jessop, an economics fellow at the Institute of Economic Affairs, described the latest inflation figures as disappointing but not surprising. He explained that most forecasters, including the Bank of England, had expected a temporary increase before next year’s main Budget measures.
He said: « Nonetheless, the news surely kills off any chance of a rate cut this week. And combined with stalling economic growth and the early signs of a slump in the labour market, talk of ‘stagflation’ could dampen confidence further. »
However, he reassured that most households should see real income growth, and public spending would offset some private sector weakness.
Mr Jessop suggested a mild period of « stagflation-lite » before inflation falls and the economy picks up in 2025. He added: « The new government’s promise to ‘kick start’ economic growth looks even more hollow, and the chances of a much worse outcome are increasing. »
However, he stressed that the Bank of England must reassure the public that it can still cut interest rates gradually next year despite inflation heading in the wrong direction.
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