The Bank of England (BoE) is widely expected to keep interest rates steady at 4.5% on Thursday, amid greater uncertainty over US President Donald Trump’s developing tariff policy, while UK wage growth and inflation data remains sticky.
The BoE has gradually reduced borrowing costs in recent months, offering some relief to mortgage holders. At its February meeting, the Monetary Policy Committee (MPC) voted 7-2 in favour of a rate cut to 4.5%.
In particular, UK inflation has increased again over the past few months, thanks in part to energy prices, water bills and bus fares.
Markets indicate a 95% chance of a rate hold this month, with a 77% probability of a cut at the MPC’s May meeting and a 55.6% likelihood of a reduction in August.
Sandra Horsfield, an analyst for Investec Economics, acknowledged that the latest official data had been “bittersweet”, as the increase in the Consumer Prices Index (CPI) inflation rate to 3% in January will not have been welcomed.
However, the 0.2% dip in the services inflation rate, the stickiness of which has presented the main concern for the MPC even as overall inflation has fallen, “will have been met with some relief,” according to Horsfield.
Policymakers will also be keeping a close eye on on the potential impact of possible spending cuts in the government’s spring statement next month.
“There will also be evidence soon, rather than merely forecasts, of how firms are handling the rises in employer national insurance contributions and the minimum wage,” Horsfield added. “Murky as the picture looks now, some things will become a lot clearer soon,” she said, adding: “The fog of uncertainty is an unavoidable constant in economic forecasting.”
The economists also warn that the Bank of England will also have to consider US President Trump’s actions which have been having a major impact on the outlook for global economic growth.