The Bank of England is expected to maintain its highest interest rates in nearly 16 years amid indications that inflation could reach the bank's 2% target sooner than expected.
The recent decline in energy prices has led economists to predict inflation could align with the target as early as April, contrasting with the Bank of England's forecast of late 2025. A slow "last mile" for inflation prompted the bank to caution last year that rates would need to remain high for an "extended period." However, economists now anticipate only one policymaker voting for a rate rise, and some believe another may vote for a rate cut for the first time since March 2020.
In December, three of the Bank of England's nine policymakers voted for a rate increase to 5.5% from 5.25%, citing rapid wage growth. Governor Andrew Bailey is expected to address the issue at a press conference following the rate decision. While some predict a victory lap on lower inflation, others, such as Mohit Kumar, Chief European Economist at Jefferies, believe it may be too soon to declare victory. He expects one official to vote for a rate cut. Economists polled by Reuters last month forecast rate cuts beginning in the second quarter of this year.
British economic growth has been sluggish, prompting the International Monetary Fund to project a meager 0.6% growth for 2024, making it the second-weakest in the Group of Seven. This economic backdrop, coupled with the possibility of further tax cuts in the March budget, may make the Bank of England cautious about signaling future policy loosening. Concerns about wage inflation persist, with annual wage growth, excluding bonuses, at 6.6% in the three months to November.
The Bank may also consider the impact of higher freight costs due to attacks on shipping in the Red Sea, potentially complicating rate cuts if conflicts in the Middle East persist. Karen Ward of J.P. Morgan Asset Management suggests that the bank may emphasize placing less weight on transitory low inflation, especially if it risks being temporary and insufficient to justify a rate cut.