Laith Khalaf, head of investment analysis at AJ Bell, provides some thoughts on the forthcoming Bank of England interest rate decision.
The Bank of England will be minded to keep interest rates on hold when it meets on Thursday and there’s been no significant economic data which would prompt them to take action at this juncture. If anything the National Insurance cut announced in the Budget will probably raise some inflationary concerns. At the last vote in February two members of the Bank’s committee wanted to raise interest rates to 5.5%, so victory against inflation is not universally accepted by policy makers.
As we head towards an election any further tax cuts could serve to postpone a reduction in interest rates, leading to a mixed picture for consumer finances. A second Budget could make some political sense seeing as once 6 April rolls around, the economic forecasts constraining the chancellor move forward another year and might open up a bit more cash for him to throw at the electorate, especially if interest rate expectations have also shifted downward too. Whether it would make any economic sense is questionable at best.
Inflation looks on a downward path if the most respected economic forecasts are to be believed, but as things stand it still sits at double the Bank of England’s 2% target, and it hasn’t moved decisively downward since last November. Combined with inflation-busting pay growth and low levels of unemployment, there’s simply no impetus for a rate cut right now.
The ONS data on the labour market isn’t in robust shape at the moment, but the Bank of England has to work with the economic inputs to hand, and has plenty of economists to take a broad reading of the UK’s economic pulse. A positive GDP growth reading in January and a pick-up in mortgage approvals also hint at underlying economic resilience in the face of tighter monetary policy, and that will only encourage the Bank to stay the course. Markets are pricing in three rate cuts in the rest of this year, which seems a reasonable working assumption, but don’t bet the house on it.
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