Bank of England is set to keep rates on hold and avoid signaling when cuts could happen

The Bank of England is expected to keep its main interest rate at near 16-year highs and indicate that lower borrowing costs aren't imminent because inflation is stuck too high for comfort

Pan Pylas
Thursday 01 February 2024 09:04 GMT
Britain Economy
Britain Economy (Copyright 2022 The Associated Press. All rights reserved)

The Bank of England is expected to keep its main interest rate at near 16-year highs Thursday and indicate that lower borrowing costs are not imminent because inflation is stuck too high for comfort.

Like the U.S. Federal Reserve on Wednesday, the U.K. central bank is not expected to steer financial markets into thinking that a rate cut is likely in the coming months, with cautious policymakers awaiting more evidence that inflation is rapidly heading down toward their target of 2%.

In December, inflation in Britain unexpectedly rose to 4%, an increase that tempered market expectations that the central bank would cut borrowing costs as soon as May.

Alongside its interest rate decision, the bank will be publishing its quarterly economic projections, and there will be particular interest on how soon it expects inflation to drop toward its goal.

On Wednesday, the Fed held rates steady but surprised financial markets with its cautious statement that it “does not expect it will be appropriate” to cut rates.

The Bank of England, like the Fed and other central banks around the world, raised interest rates aggressively from near zero to counter price rises first stoked by supply chain issues during the coronavirus pandemic and then Russia’s invasion of Ukraine, which pushed up food and energy costs.

Higher interest rates — which cool the economy by making it more expensive to borrow, thereby bearing down on spending — have contributed to bringing down inflation worldwide.

But those rate hikes — the U.K.’s key rate stands at 5.25% — also can bring their own pain, with many homeowners in Britain bracing for the fallout.

Unlike in the United States, for example, most homeowners in the U.K. lock in mortgage rates for only a few years. Those whose deals expire soon — an estimated 2 million households over the coming year — know that they face much higher borrowing costs because of the sharp rise in interest rates over the past couple of years. That's despite mortgage lenders reducing their lending rates on the assumption that the bank's main rate has peaked.

Though a predicted recession has not materialized over the past year, economic growth is muted as high rates hold people back from borrowing to buy houses or invest in businesses.

The backdrop is hardly ideal for the governing Conservative Party ahead of a general election in the coming year. Opinion polls point to a big victory for the main opposition Labour Party.

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