The decision is expected later today. In November, inflation rose for the second consecutive month to 2.6%, far above than the Bank’s target of 2%. The central bank’s Monetary Policy Committee (MPC) has to carefully balance helping a struggling economy with managing pricing pressures.
Inflation Exceeds the Target
The cost of living has been steadily rising, according to the most recent statistics, driven by rising prices for necessities like groceries and electricity. Official data indicates that November’s inflation rate of 2.6% is significantly higher than October’s rate of 2.3%, and it is well above the Bank’s 2% target.
Higher costs in industries like live entertainment, transportation, and basic foods like butter and eggs are some factors causing this increase. The Bank of England‘s mission to guide the economy toward price stability is made more difficult by these hikes, which put additional strain on household budgets.
Rob Wood, chief UK economist at Pantheon Macroeconomics, highlighted the challenges posed by stubbornly high services inflation. “Inflation rising above the MPC’s (Monetary Policy Committee’s) target is one reason why we expect rate-setters to cut interest rates gradually.” he noted.
Wage Growth and Economic Signals
Wage growth in the UK has also outpaced expectations, rising by 5.2% annually in the three months leading to October. This trend adds pressure to rising prices, as higher wages typically drive consumer spending, potentially fuelling further price hikes.
On the other hand, recent GDP data revealed a decline in October, reflecting weakening economic activity. This dual dynamic—strong wage growth offset by slowing output—adds complexity to the Bank of England’s decision-making process.
Paul Dales of Capital Economics remarked that the November inflation figure leaves little room for an early interest rate cut. His analysis suggests that while inflation may moderate slightly in December, sustained pressures could delay any reduction in borrowing costs until well into next year.
“There is almost no chance of the Bank of England delivering an early Christmas present with another interest rate cut. That’s especially the case since domestic inflation pressures appear to be a touch stronger than the Bank expected.” he added.
The decision made by the Bank of England will also have an impact on the mortgage and loan markets, where interest rates are still much higher than they were in prior years. The average two-year fixed mortgage rate is 5.04%, which means that borrowing remains expensive for both consumers and companies.
The careful stance taken by the central bank illustrates the fine balance between preventing undue economic pressure and reducing inflation, which will probably determine its course in the coming months.
