The Bank of England is expected to keep its interest rate unchanged through the end of the year, as inflationary pressures persist. Economists predict that the central bank will pause any further rate cuts while it waits for clarity from the government’s budget in November.
The decision is a crucial one for the British economy. Interest rates play a pivotal role in shaping inflation, consumer spending, and investment. Amid persistent inflation, financial analysts expect the Bank to take a wait-and-see approach, leaving many mortgage holders and businesses uncertain about future monetary policies.
Economic Impact of Inflation and Uncertainty
Inflation continues to be the dominant force in the Bank of England’s monetary policy decisions. Despite five interest rate cuts since August 2024, inflation remains stubbornly high, far from the Bank’s 2% target. According to Rob Wood, economist at Pantheon Macroeconomics, the persistence of inflation has led to a rising expectation that interest rates will stay higher for longer, possibly until 2026.
The Bank of England’s Monetary Policy Committee (MPC) has faced growing divisions over how to respond. While some members advocate for further cuts, others, such as Catherine Mann, have argued against any reductions. Mann, who has consistently voted against rate cuts, believes that inflationary pressures are still too strong to risk reducing rates prematurely.
This ongoing tension within the MPC has made it clear that the economic outlook is still fragile. Data on consumer prices shows that while inflation has softened in some areas, it remains above expectations, suggesting that the UK is grappling with more persistent inflation than other Western economies.
The Role of the Government’s Budget in Shaping Future Policy
The upcoming UK government budget, scheduled for November 26, could have a significant impact on the Bank’s decisions in December. With the government expected to address a £40 billion shortfall in public finances, it is under pressure to introduce fiscal measures that may influence the broader economy.
Sanjay Raja, senior economist at Deutsche Bank, noted that the Bank is unlikely to make any rate cuts before December, as policymakers will be waiting to see how the government’s fiscal policies play out. Proposed measures like stealth taxes or changes to pensioner benefits could affect consumer confidence and, in turn, influence inflation.
Given the uncertainty surrounding the fiscal policies and the need for careful analysis, the MPC will likely adopt a cautious stance, keeping interest rates steady until more concrete information is available. The continued rise in bond yields and inflation expectations further complicates the picture, reinforcing the idea that interest rates will remain higher for the foreseeable future.
