Will the Bank of England Reduce, Hold or Even Increase Interest Rates in December?
The next meeting of the Bank of England’s MPC (Monetary Policy Committee) is on December 19th, 2024, where it will be decided what the policy will be on interest rates. However, data released from the ONS (Office for National Statistics) shows inflation rose more than forecast in October (well above the Bank of England’s benchmark target of 2%) and has been interpreted by the financial markets as a reduction in the prospects for another interest rate cut before the end of 2024.
The ONS went on to say that in September consumer-price inflation rose from 1.7% to 2.3% due to an increase in energy bills and was above the Bank of England’s forecast of 2.2%. Furthermore, service inflation, which is always monitored closely by the MPC as a sign of domestic pressure, remained elevated at 5% up from 4.9% in September, but in line with forecasts from the Bank of England.
This is the first sign of a predicted increase in inflation for the coming year, and will no doubt be a precursor to a more cautious approach to interest rates by the Bank of England. Markets suggest that the MPC, in light of inflationary pressures both at home and abroad, may well hold interest rates and the predicted three cuts for next year have now according to experts been priced in at two cuts.
The pick-up in headline inflation between two months marks the biggest increase since October 2022 and the Bank of England has advised they expect inflation to hit the 3% mark by Q3 2025. The Bank went on to explain that this forecast is made up of last year’s fall in energy prices having now dropped out of annual calculations and the expansionary budget laid down by the Chancellor of the Exchequer. Inflation in October increased due to the UK’s households energy cap rising by 10% as opposed to a drop this time last year.
The Bank of England has previously advised that there will be a cautionary approach to cutting interest rates, and this is now backed up by the latest UK budget which should boost growth and inflation, plus there is now uncertainty surrounding the global economy with the threat of a Trump administration setting off a trade war.
The ONS has also advised that service inflation remained sticky and kept high by high prices in hotels and restaurants, plus a 6.3% increase in airlines fares on a month-on-month basis, the highest jump for any October since 2001, when records were first kept. Some analysts are even suggesting that if President elect Trump comes good on his tariff promises, combined with an inflationary UK budget, the Bank of England may even be compelled to raise interest rates.
