The Bank of England is set to announce its next interest rate decision on December 19, with its Monetary Policy Committee grappling with a delicate balancing act.
After months of persistent inflation and successive interest rate hikes the current base rate of 4.75% will either hold steady or rise slightly. It’s highly unlikely interest rates will go down.
The decision will hinge on subtle economic signals, including a cooling housing market, steady wage growth and concerns about economic stability in the face of global headwinds.
One of the key drivers of monetary policy decisions is inflation.
While headline inflation has shown signs of moderating, wage growth remains strong.
But higher wages can stoke inflation by boosting consumer spending power, potentially counteracting the Bank’s efforts to bring inflation down to its 2% target.
However, the MPC must also consider the sustainability of higher wages in the face of slowing economic activity and the potential for layoffs in key industries (Vauxhall has announced plans to close its van-making factory in Luton, putting about 1,100 jobs at risk) especially if businesses struggle with higher borrowing costs.
And across pretty much all sectors’ businesses are facing rising costs. The British Retail Consortium (BRC) reported a slower drop in prices last month, with a 0.6% decline in November compared to 0.8% in October. That marked the first increase in the inflation rate in 17 months leading BRC Chief Executive Helen Dickinson to warn that rising costs, forecasted to add £7 billion to retail expenses next year, could signal the end of falling prices.
Housing barometer
The housing market is often a bellwether for the broader economy and its current state offers mixed signals.
Latest data from HMRC revealed residential property transactions surged by 21% year-on-year in October 2024, suggesting a recovery in buyer confidence. Yet, house price growth remains subdued, with affordability pressures continuing to weigh on southern England.
Meanwhile mortgage rates appear to have stabilised, with typical new monthly costs falling by 9% over the past year, from £1,116 to £1,060. This has eased financial pressures on homeowners and first-time buyers alike.
The MPC will likely view the housing market’s recent resilience as a sign that consumers are adjusting to a higher interest rate environment.
However, policymakers must tread carefully; pushing rates too high risks derailing the fragile recovery, while pausing could be interpreted as a premature signal of victory over inflation.
Home and away
The Bank of England’s MPC need to take world affairs into account. Globally, central banks have signalled cautious optimism, with the U.S. Federal Reserve and the European Central Bank (ECB) hinting at potential pauses in their rate-hiking cycles. Any divergence in monetary policy could impact the value of the pound, influencing import costs and inflation.
Europe too has concerns over the return of Donald Trump as U.S. president.
Trump has renewed threats to raise tariffs, suggesting a 10% hike on China and 25% on Mexico and Canada. He also warned of heavy tariffs on European goods, especially cars, saying the EU would ‘pay a big price’. This has led investors to expect the ECB to ease monetary policy aggressively. A 0.25% rate cut next month is already expected, and the chance of a larger 0.50% cut has risen to 58%.
Meanwhile at home, Chancellor Rachel Reeves’ recent budget has introduced its own set of variables.
Targeted fiscal measures, while aimed at stimulating growth, could add inflationary pressures that the Bank may feel compelled to counterbalance with tighter monetary policy. The Office for Budget Responsibility (OBR) estimates a 15% increase in household disposable incomes since mid-2022, a trend that has supported spending and mitigated the impact of higher borrowing costs.
Given the complexities, the Bank of England’s options for its December meeting are finely balanced. One way or the other, they’re either going up, likely to 5%, or they will stay the same.
The coming weeks will be telling. The MPC’s decision will ultimately hinge on its assessment of the inflationary landscape versus risks to economic growth.
As we head towards the end of the year one thing is clear: the Bank of England’s actions will set the tone for 2025, shaping market expectations and consumer confidence alike.
For now, a cautious pause seems the most likely outcome but the margin for error has rarely been narrower.
The information contained within was correct at the time of publication but is subject to change.
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