The Bank of England is expected to announce a third interest rate cut in six months, with economists predicting a reduction to 4.50%. This move comes despite inflation remaining above the bank's target rate. The base rate influences the cost of borrowing for mortgages and loans, as well as the returns on savings offered by banks.
Analysts are closely watching the bank's economic forecasts and the tone of the Governor during the subsequent press briefing. The decision to cut rates is driven by concerns over a stagnant economy and declining employment levels.
The Monetary Policy Committee aims to achieve a 2% inflation target over the next few years. While current inflation stands at 2.5%, it is expected to trend lower towards the target in the future, allowing for the rate cut.
Recent data revealed a surprise drop in the inflation rate to 2.5% in December, primarily due to easing price pressures in the services sector, which makes up a significant portion of the U.K. economy.
Another factor contributing to the rate cut is the stagnation of economic growth in the U.K., which is likely to exert downward pressure on inflation levels. Inflation has decreased significantly from previous highs, partly due to central banks raising borrowing costs during the pandemic and subsequent supply chain disruptions.
Central banks worldwide, including the U.S. Federal Reserve, have begun reducing interest rates as inflation rates have moderated. However, experts do not anticipate rates returning to the ultra-low levels seen post the 2008 financial crisis and during the pandemic.
