Economists are warning that the Bank of England is likely to pause cutting interest rate cuts ahead of this week’s upcoming Monetary Policy Committee (MPC) meeting.
In August, policymakers at the central bank narrowly voted to slash the UK’s base from a 16-year high to five per cent.
However, the Bank’s governor Andrew Bailey has previously called on MPC members to be “careful” to not rush any decisions to avoid provoking inflation.
Amid the ongoing cost of living crisis, the consumer price index (CPI) rate of inflation soared to unprecedented heights of 11.1 per cent.
This led to the Bank of England raising interest rates to 5.25 per cent which it began to reverse two months ago.
Analysts are pricing in another rare reduction later this year but likely not on September 17 when the committee members next meeting.
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Bailey cited easing inflationary pressures had “eased enough” to allow interest rates to be reduced.
For May and June, the CPI inflation rate fell to the Bank’s desired target of two per cent but jumped slightly to 2.2 per cent in July.
Economists from ING highlighted that caution is being taken due to inflation in the services sector which the Bank of England is closely monitoring.
Services-only inflation hit 5.2 per cent in July, down from 5.7 per cent the previous month, however this remains above the rates found in the US and Eurozone.
This group of economists believe most of the committee to vote to keep rates on hold this month, before rate cuts begin again in November.
Sanjay Raja, a senior economist for Deutsche Bank, noted that “despite cutting rates in August, the MPC struck a more cautious tone around inflation risks – something that will likely stick in September”.
Investec Economics’ analysts suggest that the Bank of England is unlikely to follow up August’s decision with a “back-to-back cut”.
Despite this, they referred to the economic data showing the gross domestic product (GDP) recorded no growth in July for the second month in a row.
Based on this economic analysis, this could raise the likelihood of another interest rate reduction.
Andrew Goodwin, the chief UK economist for Oxford Economics, said most members of the Monetary Policy Committee will pause carrying out any drastic decisions.
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He said: “[They are] likely to be content to sit back and reassess the situation in November, a meeting at which the MPC will update its forecasts to incorporate the impact of the Budget”.
“We think that fiscal event will be the factor most likely to push the MPC off the gradual loosening path that it advocated in August,” he said, meaning it could start cutting rates more quickly.
Earlier this week European Central Bank’s (ECB) voted to cut interest rates in the Eurozone on Thursday, the second reduction in a row.
Next week, the US’ Federal Reserve is expected to cut rates by up to 0.50 percentage points.