Will Bank of England governor Andrew Bailey play Santa or Scrooge on interest rates?
There is a buzz outside the Bank of England.
City workers are taking advantage of the unusually mild weather to enjoy lunch outside, and there’s been a change in temperature inside the Bank, too.
Decision to keep interest rate at 4 percent It’s done on the tightest of margins, and the interest rate panel thinks inflation has peaked.
Governor Andrew Bailey said he wants to see if future developments confirm that view before lowering interest rates; Weakness in the labor market may also play a role.
The bank also noted that last year’s Budget measures, such as increases in employer National Insurance Contributions and minimum wages, contributed to price pressures last year.
A key factor in future decisions will be the content of the next Budget, which could ease price pressure through direct measures on bills, but also tax increases that take money out of pockets.
The chancellor was willing to request a loan because he had created the conditions for interest rate cuts by providing the right environment. But the Bank’s report makes clear that last year’s Budget measures contributed to price pressures and hiring hesitancy by increasing employer costs.
Ironically, it may be the impact on the labor market that is contributing to the views of rate setters currently seeking to reduce the cost of borrowing.
While the Bank refused to speculate on the content of this Budget, it noted signs that concerns elsewhere among consumers and businesses may be constraining the economy.
It forecasts the economy will grow 1.2% in 2026, with consumer spending remaining cautious; This is less than 1.5% of this year’s forecast, which will not be welcomed by the Treasury.
The interest rate panel will have a lot to consider in the Budget: the size and shape of tax increases, help with energy bills and possibly other cost-of-living challenges, and increases to the National Living Wage.
According to the bank’s research, labor costs remain a significant uncertainty for both employers and consumer prices.
Rate setters will have to consider the impact of these policies and the usual monthly evidence on inflation, employment and so on by the next meeting in mid-December.
In fact, by keeping the vote cast, it may be the governor who finds himself wondering whether to play Santa Claus or Scrooge.
Otherwise, economists predict the cut will come in February.
So how many more will follow?
The bank said it sees rates continuing on a “gradual downward path.” Some members remain uneasy about continued inflationary pressures.
For example, his research shows that our inflation expectations are shaped by recent experiences, especially movements in food prices.
The impact of recent price rises still scares us and there is a risk that people and businesses may act as if inflation is higher than it actually is, through wage demands or price increases.
Meanwhile, hundreds of thousands of homeowners could face rising costs when renewing their mortgages if interest rates remain high.
Borrowers can expect more gifts in 2026, but those gifts may only come gradually.
