London: The Bank of England (BoE) is expected to consider a reduction in interest rates following a year of maintaining rates at a 16-year high of 5.25 percent. Despite this potential shift, market predictions and economist opinions remain divided on whether the British central bank will proceed with the cut.
The decision is expected to be closely contested within the BoE’s Monetary Policy Committee (MPC), with a projected 5-4 majority in favour. Financial markets have priced in a 66 percent chance of a quarter-point cut, with expectations of an additional cut by the end of the year.
Jack Meaning, Chief UK Economist at Barclays remarked that, “It’s certainly going to be a finely balanced decision. You can see that from the market pricing.”
In June, the MPC voted 7-2 to maintain the current rate. After the meeting, several members who voted to keep rates steady were near voting for a cut. The shift in their stance since then remains uncertain. The recent appointment of Clare Lombardelli, a former OECD and finance ministry chief economist, as deputy governor, has resulted in the MPC having a female majority for the first time.
The British consumer price inflation has returned to the BoE’s target of 2 percent in both May and June, a significant drop from the 41-year high of 11.1 percent recorded in October 2022. This positions UK inflation below that of the Eurozone (where the European Central Bank reduced rates in June) and the United States (where the Federal Reserve maintained steady rates).
BoE despite this progress anticipates a rise in headline inflation over the coming months, focusing on medium-term inflation drivers such as services prices, wages, and labour market tightness. Services price inflation has decreased less than the BoE had forecasted, raising concerns about persistent inflationary pressures and unexpected factors like recent hikes in hotel prices due to high-profile events.
The forthcoming decision by the BoE will be a critical indicator of the central bank’s approach to the evolving economy of the UK.
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