The Bank of England is expected to hold interest rates steady at 4.75 per cent on Thursday after it was revealed that inflation in November rose to 2.6 per cent, above the central bank’s target.
The Office for National Statistics revealed inflation had risen to 2.6 per cent from 2.3 per cent, pushed higher by pricier petrol and clothing.
The central bank uses higher interest rates as a tool to try and tame inflation, forcing families to spend more on borrowing rather than pushing up the prices of goods.
Another pressure on inflation comes from rising wages. Pay packets are now growing at 5.2 per cent, up from 4.9 per cent three months ago, according to data from the Office for National Statistics released earlier this week.
Money market traders have pushed back their expectation of a rate cut to May. Previous market activity suggested that a cut could have come in March.
Commercial lenders like high street banks and building societies use the bank base rate as a guide on how much to charge borrowers and how much to reward savers.
Before the big announcement – and to cover our backs in case rates do go up or down – here is an excellent chart from the Financial Times’ Alphaville blog, charting expectations from the markets on what rates will do in the US and what they actually did.
This is for US interest rates, but you bet that Bank of England predictions are similarly fallible.
Wall Street had a minor meltdown yesterday after that rate decision, with the S&P500 ending the day down 2.95 per cent. The slow down in interest rare cuts was well flagged, said Russ Mould, investment director at stockbroker AJ Bell
“Markets are normally good at reading the signs, but the sell-off on Wall Street last night would suggest investors had started on the Christmas sherry a bit early and were caught out by the Fed’s announcement about where rates might go in 2025,” says Mr Mould.
“The prospect of a slowdown in interest rate cuts was front and centre days before the Fed’s latest update, but investors seemed to miss the signs.
“The US economy has been holding up well and Donald Trump’s policies are inflationary, meaning the Fed has no reason to keep snipping away on a regular basis.
The Federal Reserve, which is the US central bank, decided to cut rates yesterday,. The Fed uses a range, and cut its range by 0.25 percentage points to 4.24-4.5 per cent.
Pushpin Singh, Senior Economist, Centre for Economics and Business Research said: “The Federal Reserve (the Fed) opted to cut interest rates for the third consecutive meeting, by 25 basis points, yesterday evening. The decision was accompanied by the Federal Open Market Committee’s (FOMC) publication of its latest projections.
The Fed said it expects the US economy to grow by more than expected and that inflation may also be higher than thought. Rate cuts may not come as thick and fast as previously thought.
“ The central bank now expects only 50 basis points worth of cuts next year, down from the 100 basis points in its last projection, signalling a hawkish stance on monetary policy and underscoring concerns of lingering inflationary pressure more broadly.”
Most City-watchers are convinced interest rates will be held at 4.75 per cent today, but what about after that?
Analysts at investment bank Goldman Sachs said that the Bank is likely to cut interest rates every three months, “given firmer near-term inflation numbers and uncertainty around the impact of the employer national insurance hike”.
Nomura analysts think rates will settle in the longer term at about 3-3.5 per cent.
Rates have been on a merry journey since the financial crisis, when borrowing was close to free for some debtors, including various governments.
The record high was 17 per cent in November 1979, which remained the rate until July 1980.
The record low was 0.1 per cent in March 2020 in the wake of Covid.
From 1719 to 1822 rates were fixed at 5 per cent.
If you are just joining us, we are counting down to noon, to see which way the Bank of England will go on interest rates. Centre for Economics and Business Research Senior Economist Charlie Cornes thinks they will be held at 4.75 per cent.
Mr Cornes said: “CPI inflation in the UK rose for a second consecutive month in November, to 2.6 per cent, driven by higher prices for motor fuels and clothing. Meanwhile, core and services inflation, both indicators carefully monitored by the Bank of England (BoE) as measures of underlying price pressure, remain elevated, at 3.5 per cent and 5.0 per cent respectively. He said recent wage growth data are “all signs are pointing towards the BoE holding off on cutting interest rates.” “Instead, Cebr maintains that the next rate cut will be in Q1 2025.”
Higher inflation pushed the pound down, which aided valuations for FTSE 100 companies, many of which earn on dollars and euros, being massive multinationals.
“A weaker pound following the latest UK inflation figures gave a boost to the FTSE 100 and its bounty of dollar earners. The UK index rose 0.2 per cent to 8,208, led by Shell and BP, with Ashtead among the big US-focused players giving support,” says Russ Mould, investment director at stock broker AJ Bell.
“UK inflation at an eight-month high sounds dramatic yet the annual 2.6 per cent rate is bang in line with expectations and core inflation, which excludes food and energy, at 3.5 per cent came in lower than the 3.6 per cent consensus figure.
“As such, we haven’t had what the market would describe as an ‘inflation shock’. That explains why shares in interest rate-sensitive sectors like housebuilding haven’t retreated on the latest figures.
Chancellor Rachel Reeves said there is “more to do” to combat cost-of-living pressures.
“I know families are still struggling with the cost of living and today’s figures are a reminder that for too long the economy has not worked for working people,” she said on Wednesday.
“Since we arrived real wages have grown at their fastest in three years. That’s an extra £20-a-week after inflation.
“But I know there is more to do. I want working people to be better off which is what our Plan for Change will deliver.”
What went up and down in the inflation figures from yesterday?
The rate of CPI inflation for food and non-alcoholic drinks, alcohol and tobacco, clothing and footwear, recreation and culture all edged higher over the year to November, compared with the year to October.
It follows a hike to tobacco duties at the end of October.
Petrol prices also rose by 0.8p per litre between October and November to stand at 134.8p per litre, and diesel prices increased 1.4p per litre to 140.5p per litre.
Overall prices across the transport sector fell by 1.1 per cent in the year to November, but at a slower rate than the 2 per cent fall in the year to October, meaning it was the biggest factor pushing inflation higher last month.
In better news, air fares tumbled by 19.3 per cent in November, largely driven by falls in ticket prices on European routes, the Office for National Statistics said.
Just to hedge our bets ahead of the announcement, traders in the financial markets are expecting about a 10 per cent chance of a rate cut, Investec Economics said on Wednesday
Rob Wood, chief UK economist for Pantheon Macroeconomics, said: “Inflation rising above the MPC’s (Monetary Policy Committee’s) target is one reason why we expect rate-setters to cut interest rates gradually.”
Rate cuts next year are far more likely, assuming inflation is brought to heel.