The Bank of England is expected to maintain its current interest rate at 4.75% as inflation in the U.K. continues to exceed the target rate of 2%. Despite the stagnant state of the British economy, with two consecutive months of contraction, the Monetary Policy Committee is likely to adopt a cautious approach due to elevated price pressures in the services sector, which constitutes a significant portion of the U.K. economy.
The recent rise in inflation to 2.6% has limited the room for interest rate cuts, as lower borrowing costs could further fuel inflation. This decision is disappointing for struggling sectors that could benefit from reduced interest rates in a period of sluggish growth. Economists anticipate that interest rates are unlikely to see significant reductions in the near future.
In the U.S., the Federal Reserve has also tempered expectations of rate cuts following its recent reduction. Critics have raised concerns about the impact of the new Labour government's budget, which has increased inflationary pressures while potentially dampening economic growth through higher business taxes.
Despite the challenges, inflation rates in the U.K. and globally have moderated from previous highs, attributed in part to central banks raising borrowing costs during the pandemic and subsequent supply chain disruptions. As inflation eases, central banks have begun to lower interest rates, although a return to the ultra-low levels seen post-2008 financial crisis is not expected.
