The Bank of England could hit the pause button on interest rate cuts after warning it needs to be “careful” not to rush the decision as pressures on inflation linger.
Experts think that the Bank’s rate-setting committee will likely keep UK interest rates at 5% on Thursday.
The central bank had cut rates from 5.25% in August, pushing through the first reduction since 2020.
Governor Andrew Bailey said it was able to do so because inflationary pressures had “eased enough”, but stressed that policymakers “need to be careful not to cut interest rates too quickly or by too much”.
UK Consumer Prices Index (CPI) inflation returned to the Bank’s 2% target level in May and June, but then crept up to 2.2% in July.
A group of economists for ING said some of the caution can be explained by inflation in the services sector, things like hospitality and, which the Bank’s policymakers watch closely when trying to work out how much domestic prices are rising.
Services-only inflation hit 5.2% in July, down from 5.7% the previous month, but still above the levels seen in the US and Eurozone.
They expect the majority of the committee to vote to keep rates on hold this month, before the pace of cuts picks up again in November.
Sanjay Raja, senior economist for Deutsche Bank, said that “despite cutting rates in August, the MPC struck a more cautious tone around inflation risks – something that will likely stick in September”.
He also thinks the Bank will keep rates the same on Thursday but then reduce them again in November.
Analysts at Investec Economics agreed that the Bank is unlikely to follow up August’s decision with a “back-to-back cut”.
But they also referred to the latest official data showing the economy recorded no growth in July, the second consecutive month of stagnation, which could raise the likelihood of another rate cut.
Andrew Goodwin, chief UK economist for Oxford Economics, said most members of the Monetary Policy Committee are “likely to be content to sit back and reassess the situation in November, a meeting at which the MPC will update its forecasts to incorporate the impact of the Budget”.
“We think that fiscal event will be the factor most likely to push the MPC off the gradual loosening path that it advocated in August,” he said, meaning it could start cutting rates more quickly.
Meanwhile, the Bank of England could take note of the European Central Bank’s (ECB) decision to cut interest rates in the Eurozone on Thursday, the second reduction in a row.
The ECB’s rate-setting council lowered the main deposit rate from 3.75% to 3.5% at the meeting.
Elsewhere, the US’s Federal Reserve could implement its first cut to the nation’s interest rates next week.