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The
nine-member Monetary Policy Committee is widely expected to keep
the bank's main interest rate unchanged at 4.75% in the wake of
figures showing inflation rising to 2.6%, further above the
target of 2%.
With price pressures elevated in the crucial services sector,
which accounts for around 80% of the U.K. economy, and wages
strong, there are few indications that inflation will get back
towards the target anytime soon. As a result, the rate-setting
panel, which last cut its key rate in November, is set to take a
cautious stance, as lower borrowing rates could stoke inflation.
That's a disappointment for many struggling sectors in the U.K.
economy that would be helped by lower interest rates in an
environment of paltry growth — in fact the British economy has
contracted for two months in a row.
“Persistent price pressures will prevent the Bank of England
from responding to flat output and falling employment by cutting
interest rates,” said Andrew Wishart, an economist at Berenberg
Bank.
Few economists think interest rates will drop dramatically in
2025 either. It's a similar picture in the U.S., where the
Federal Reserve reined in expectations Wednesday of reductions
next year after its latest rate cut.
Critics argue that the new Labour government’s first budget in
October has both elevated inflation pressures while also damping
down on growth. A big increase in business taxes may see firms
try to offset the additional costs by raising prices or cutting
down on hiring. The government argues that it needed to raise
taxes to shore up public finances and inject money into
cash-starved public services.
Still, inflation in the U.K. and across the world is far lower
than it was a couple of years ago, partly because central banks
dramatically increased borrowing costs from near zero during the
coronavirus pandemic when prices started to shoot up, first as a
result of supply chain issues and then because of Russia’s
full-scale invasion of Ukraine which pushed up energy costs.
As inflation rates have fallen from multidecade highs, the
central banks have started cutting interest rates, though few,
if any, economists think that rates will fall back to the
super-low levels that persisted in the years after the global
financial crisis of 2008-2009.
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