The City is not expecting any fireworks from the Bank of England at its early November interest rate meeting, amid signs inflation is falling alongside fears of a wider recession.
With the Monetary Policy Committee’s next vote due on Thursday, Square Mile experts are more-or-less united in expecting the base cost of borrowing to stay on hold at 5.25% for the second consecutive meeting.
The MPC held the rate which sets the price of variable mortgages and loans in September, ending a run of 14 consecutive hikes dating back to December 2021. The pause came amid signs that the BOE’s campaign to tame inflation is working and alongside fears that the UK’s flatlining economy could be in jeopardy of falling into recession.
Higher costs faced by mortgage holders and other borrowers constrain spending and help ease the rate at which prices rise. Inflation peaked at just over 11% in October 2022, led by soaring energy prices after Vladimir Putin’s invasion of Ukraine. The BOE base rate was 2.25% then. It reached 5.25% in August.
But it was a close call to leave it there at the last meeting, with the MPC’s nine members voting five-to-four to hold rates, with Governor Andrew Bailey in the majority. The dissenters all backed a quarter-point hike, which would have taken rates to 5.5%.
The BOE also signalled that it expected rates to stay higher for longer, in a sign that it was ready to settle in for a period of peak rates before it had room for any cut to boost economic growth.
This time around, most forecasters expect no hike and no knife-edge vote.
HSBC economists predict a six-to-three split in favour of 5.25%. Analysis from the bank says: “The latest inflation and wage growth data moderated, supporting our call, albeit they remain high.”
It added: “In terms of the BoE’s new forecasts, we expect some small upward revisions to the medium-term inflation forecasts, and for the BOE to keep the door open to future tightening.”
Since the August MPC vote, the main measure of inflation the Consumer Price Index, held at 6.7% in September, staying at the 18-month low hit in August. But it is expected to fall sharply in October, thanks in part to the lower energy price cap.
The BOE’s inflation target is 2%.
The latest economic data, out earlier this month for August, showed monthly growth returned, at 0.2%, to the size of gross domestic product (GDP), which tracks the total value of goods and services . Although that was stronger than the shrinkage of 0.6% seen in July, it leaves the economy bumping along near the flatline.
Michael Hewson, chief market analyst at CMC, said: “There ought to be enough evidence this week for a majority decision to hold rates, with perhaps one or two of the 4 hawks who voted for a hike in September deciding to uphold the status quo, while downgrading their GDP forecasts."
According to forecasts from economists polled by financial data provider Bloomberg, the MPC vote will be seven-to-two for no change, with both dissenters backing a quarter-point rise.
Martin Beck, chief economic advisor to the EY ITEM Club, a well-known forecaster, said: “Past rises in interest rates seem to be increasingly weighing on economic activity. GDP growth bounced back a little in August, but this still left output on course to have stagnated or shrank in the third quarter.”
