The Bank of England is poised for a tightly contested interest rate decision on Thursday amid growing concerns about the hit to growth from budget tax rises and lower-than-forecast inflation.
The Bank’s monetary policy committee (MPC), the nine economists who meet every six weeks to set the base interest rate in the UK economy, is tipped to narrowly vote in favour of holding borrowing costs at 4 per cent.
However, several City experts have predicted that the committee will elect to cut rates by a quarter of a percentage point to 3.75 per cent after figures showed inflation was lower than expected at 3.8 per cent.
Rates have fallen five times since August last year, from a peak of 5.25 per cent to 4 per cent. The Bank is tasked with keeping inflation at 2 per cent over the medium term.
The Bank raises interest rates in response to a burst in inflation to make it more expensive for households and businesses to borrow, which in theory constrains spending and in turn curbs price growth. Interest rate cuts are intended to stimulate business investment and consumer spending and economic growth, but they can stoke inflation.
In recent weeks expectations that the Bank will lower rates one more time before the end of the year have gathered pace amid the first drop in food inflation since March and a rise in unemployment to a four-year high.
Before this better-than-expected economic data, financial markets thought the central bank would wait until as late as the middle of next year to cut borrowing costs again.
Complicating the MPC’s decision-making process is that it will deliberate on whether to lower or hold rates before Rachel Reeves delivers the budget on November 26. The chancellor is expected to raise taxes by up to £40 billion, potentially including a manifesto-breaking rise in income tax.
Analysts have argued that the MPC should pre-emptively cut rates before the budget to offset the growth-harming effects of tax increases. Goldman Sachs, Nomura and Barclays have predicted that the central bank will lower rates on Thursday.
Dean Turner, an economist at UBS, the Swiss investment bank, said that November’s MPC meeting was “one of the hardest to call for some time”, adding that rates would eventually come down again but “the hard part is anticipating when”.
“Data flow since September supports a cut,” Jack Meaning, an economist at Barclays, said, adding that further evidence of high tax rises at the budget would convince the committee that inflation would decline in the coming months.
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Alongside its interest rate decision, to be announced at midday, the Bank of England will release economic forecasts, including its own assessment of medium-term productivity growth.
It is expected that the Office for Budget Responsibility, the governemt’s forecaster, will lower its productivity projections, delivering a £20 billion hit to the public finances.
In an update to its communications, each of the nine members of the Bank of England’s rate-setting panel will provide written details of why they took their respective interest rate vote in new quarterly economic forecasts to be published on Thursday.
Last month the US Federal Reserve lowered rates by a quarter point to a range of 3.75 per cent to 4 per cent. The European Central Bank left rates unchanged at 2 per cent.