Bank of England set to hold rates as inflation concerns build in UK

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BoE holds rates amid inflation

Highlights

Bank of England expected to hold its benchmark rate at 3.75% on Thursday as most MPC members advocate caution amid mixed economic signals.
UK inflation slowed to 2.8% in April but is forecast to reach 3.3% for 2024 due to rising oil prices and a summer energy price cap increase.
UK job openings fall to a three-year low of 705,000 in the three months to April, signaling labour market weakening and moderating wage pressures.

Policy debate ahead of Thursday decision

As reported by Financial Times, Bank of England governor Andrew Bailey is likely to lead a majority in favour of leaving rates unchanged, while at least two policymakers are signalling support for an immediate increase.

The MPC is widely expected to keep its benchmark rate at 3.75% after Bailey and deputy governor Sarah Breeden urge caution over tightening policy too quickly. Breeden says the BoE cannot afford to be "trigger-happy" on rates given the economic damage from geopolitical turmoil and a loosening labour market.

Economists also point to softer domestic conditions as a reason for patience. Hetal Mehta, an economist at wealth manager St James’s Place, says labour market momentum has cooled significantly and there is not enough impetus to justify a rate rise now.

Even so, chief economist Huw Pill and external member Megan Greene have both signalled they want a pre-emptive increase to stop higher wages and prices from feeding into a more persistent inflation cycle. External member Catherine Mann has also left open the possibility of a rise if the energy crisis worsens, while deputy governors Dave Ramsden and Clare Lombardelli have not recently indicated how they plan to vote.

Inflation risks and global central bank pressure

UK inflation eases to 2.8% in April, but analysts surveyed by Consensus Forecasts expect it to reach 3.3% for the full year as higher oil prices combine with an increase in the energy price cap this summer.

Recent economic signals remain mixed. The UK economy grows by 0.6% in the first quarter, but data released on Friday show a contraction in April alone. The BoE’s Decision Maker Panel survey also suggests only modest wage pressure, with expected year-ahead wage growth edging down to 3.4% from 3.5% in the three months to March.

The labour market continues to weaken, with job openings falling to 705,000 in the three months to April, the lowest level since 2021. Medium-term inflation expectations among firms and households also remain near levels seen before the Middle East crisis.

The broader international backdrop is adding to the policy debate. The European Central Bank raises its key rate by a quarter point to 2.25%, the Bank of Japan is widely expected to lift rates on Tuesday, and some economists see rising pressure on the U.S. Federal Reserve to tighten policy before year-end.

Bailey says the BoE has room to hold steady because markets priced in tighter policy after the bank’s March meeting, helping to restrain activity. Greene argues that effect will not last without actual rate increases, and says the longer the war persists, the stronger the case for hiking.

In our earlier article on UK manufacturers’ warnings over high energy costs, we covered how elevated power bills are eroding competitiveness and increasing the risk of production shifting abroad. Industry groups argued that existing relief has not reached much of the sector and urged the government to widen and accelerate support as geopolitical tensions keep energy prices under pressure.

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