Bank of England Poised to Cut Interest Rates Amidst Inflation Concerns

The Bank of England is poised to reduce interest rates for a third time in six months, despite inflation remaining above its target. Most economists anticipate that the nine-member Monetary Policy Committee will lower the base rate by 0.25% to 4.50%, marking its lowest level since mid-2023.

The base rate influences mortgage and loan costs for individuals while dictating returns on bank savings. Financial markets eagerly await the bank's economic forecasts and Governor Andrew Bailey's tone in the subsequent press briefing.

"The bank has been cutting rates alternately, but a stagnant economy and declining employment necessitate more immediate action," said Andrew Wishart, senior U.K. economist at Berenberg Bank.

The committee aims to achieve an inflation rate of 2% based on the Consumer Prices Index over the next few years. Although inflation currently stands at 2.5% and may rise due to business tax increases imposed by the Labour government, economists predict a downward trend towards the target, enabling the rate cut.

Official data released earlier in January revealed an unexpected decline in inflation to 2.5% in December, primarily attributed to easing price pressures in the service sector, which constitutes 80% of the U.K. economy.

Economic stagnation in the U.K. presents another potential reason for lowering borrowing rates, as it is expected to exert downward pressure on inflation. Inflation has significantly decreased from its peak in previous years, partly due to central banks raising borrowing costs from near-zero levels during the COVID-19 pandemic. Price surges followed, initially driven by supply chain disruptions and subsequently exacerbated by Russia's invasion of Ukraine, which escalated energy costs.

As inflation has moderated from its multi-decade highs, central banks, including the U.S. Federal Reserve, have initiated interest rate cuts. However, few economists anticipate a return to the ultra-low rates witnessed during the years following the 2008-2009 global financial crisis and the pandemic.