Bank of England expected to hold interest rates at 15-year high

The Bank of England is expected to hold interest rates for the third time in a row, as fresh data has pointed towards potential cracks in the economy.

On Thursday, the Bank of England’s Monetary Policy Committee (MPC) will meet for the final time this year to vote on interest rates – which help dictate mortgage rates set by banks.

The central bank had hiked interest rate in 14 consecutive meeting until they peaked at a 15-year high of 5.25%.

Rate setters from the bank had increased borrowing costs to put pressure on consumer spending in order to bring down inflation.

However, the MPC held rates in the September and November meetings after witnessing a notable cooling in the rate of inflation.

The latest meeting comes after key economic data from the Office for National Statistics (ONS) this week also showed signs of cooling in the economy.

On Wednesday, the ONS said UK gross domestic product (GDP) fell 0.3% in October, as the manufacturing and construction sectors were impacted by poor weather.

It came a day after the statistics body revealed that wage growth slowed at the fastest pace for two years.

The ONS said private sector regular earnings, excluding bonuses, rose by 7.3% in the three months to October, down from 7.8% in the previous three months, pointing towards weakening in the labour market.

Economists have increased their expectations for the interest rate cuts next year as a result.

Previously, the financial markets had priced in 0.75 percentage points of interest rate cuts in 2024, but on Wednesday they were expecting a 1 percentage point drop, which would take interest rates to 4.25% by the end of 2024.

Nevertheless, experts are still expecting rates to remain steady in Thursday’s vote and in the early months of the New Year.

Martin Beck, chief economic advisor to the EY Item Club, said little has changed since the previous rate decisions – held in September and November – to bring about a different result.

“December’s MPC meeting will almost certainly prove the third in succession to deliver no change in interest rates,” he said.

“There’s been nothing in the way of significant economic surprises over the last four weeks and inflation and pay growth have slowed (the former by more than the Bank of England expected).”

The Bank of England has remained cautious about rate cuts despite signs of cooling inflation and subdued economic activity in recent data.

The Bank’s governor, Andrew Bailey, and other member of the MPC, have indicated rates will remain where they are for some time.

At Parliament’s Treasury Committee last month, Mr Bailey suggested the threat of UK inflation is being underestimated and said the Bank is still focused on concerns over persistent inflation.

He indicated that inflation in the services sector, where most Britons spend their money, is likely to remain at around 6% through the start of 2024.

James Smith, developed markets economist at ING, said he therefore expects the Bank to reiterate this message.

He said: “Markets are pricing three rate cuts in 2024 and we doubt the Bank will be too happy about that.

“Expect policymakers to reiterate that rates need to stay restrictive for some time.

“We only get a statement and minutes on Thursday, and no press conference or forecasts, so the opportunity to shift the messaging is fairly limited.”

The Bank of England has also warned that nearly a million people could see mortgage repayments soar by more than £500 a month by the end of 2026 as pressure from higher rates continues to feed into the economy.