The Bank of England (BoE) is widely anticipated to maintain its key interest rate at 4.25% as policymakers prepare to announce their latest monetary decision. This follows a quarter-point rate cut in early May, which marked the fourth reduction in a year and hinted at the possibility of further cuts in the near future.

However, analysts now believe that additional rate reductions are unlikely before the end of the year, citing persistently high inflation that remains above the central bank’s 2% target.

Interest rates set by the BoE serve as a benchmark for borrowing costs across the financial sector, influencing the rates that banks and building societies charge borrowers and pay to savers.

The Monetary Policy Committee (MPC) will release its decision at 12:00 BST.

Economic Uncertainty Challenges Policy Direction

The May rate cut from 4.5% to 4.25% was intended to stimulate the UK’s sluggish economy. But with inflation still elevated—reaching 3.4% in May, the highest in over a year—policymakers face a delicate balancing act. While lower rates can spur investment and consumption, they also risk fuelling further price increases.

April brought an unexpected 0.3% contraction in the UK economy, attributed to rising corporate taxes, soaring household bills, and a significant drop in exports to the U.S. These developments have added urgency to calls for more accommodative monetary policy.

Food prices have climbed sharply, placing additional strain on household budgets and sustaining high headline inflation. In this environment, the Bank of England continues to rely on interest rates as its primary tool to control inflation and guide it back toward the 2% target.

Global Tensions Add Complexity

Geopolitical risks are further complicating the BoE’s policy considerations. Escalating tensions between Israel and Iran pose a potential threat to global oil supply, which could drive up fuel costs and stoke inflation.

Simultaneously, the fallout from recent U.S. tariff policies must also be taken into account, as they may reshape global trade flows and commodity prices.

While most economists predict the BoE will implement two additional rate cuts this year, a growing number expect only one. Monica George Michail, Associate Economist at the National Institute of Economic and Social Research (NIESR), cautioned against expecting swift easing:

“We project that inflation will remain above 3% for the remainder of the year, driven by continued wage growth and inflationary pressures from increased government spending,” Michail said.
“Additionally, ongoing instability in the Middle East is contributing to greater economic uncertainty. Therefore, we expect the Bank to keep rates steady this Thursday and to make only one more cut in 2024.”

Impact on Households and Borrowers

The BoE’s base rate directly affects the rates banks charge for loans and mortgages, as well as the interest paid to savers. Over the past few years, higher base rates have translated into more expensive borrowing for consumers, but have also boosted returns on savings accounts.

More than 80% of mortgage holders in the UK are on fixed-rate deals and have experienced notable increases in their monthly payments when refinancing during recent years of elevated rates.

Despite recent market calm, fixed mortgage rates remain relatively high. The latest data from financial information provider Moneyfacts shows the average two-year fixed mortgage rate at 5.12%, while five-year deals stand at 5.10%.

Approximately 600,000 homeowners have mortgages that track the BoE base rate directly. For them, any movement in interest rates—whether a hike or a cut—has an immediate and tangible effect on their monthly payments.

(Cre: BBC)