The Bank of England is expected to hold interest rates at the same level at its next policy decision on Thursday in a blow for homeowners. Policymakers will announce the result of their next meeting on December 19, where most analysts think they will vote to maintain the UK’s base interest rate at 4.75 per cent.
The base rate influences how much banks charge for loans and mortgages, and it has been kept high in recent years to curb rampant inflation – sending people’s house payments through the roof. Inflation fell back below the Bank’s 2 per cent target earlier this year, prompting the Bank to cut rates in August and November.
But last month, official figures showed it jumped back up to 2.3 per cent in October, its sharpest rise in two years. The uptick in inflation was widely expected because of rising energy bills, but the increase was still more acute than most people had forecast.
It has dampened the few remaining hopes that policymakers might vote for one more rate cut this year. The Bank is also likely to be cautious after Labour increased taxes on business in its Budget in October.
Chancellor Rachel Reeves increased the amount businesses have to pay on national insurance contributions (NICs) in the spending statement. The tax rises are designed to pay for more government spending on improving services like public transport and the NHS, but some experts have warned they could be inflationary.
Andrew Bailey, the Bank’s governor, said at the start of December that it is not yet clear what effect the NICs increase will have on the economy, but that it is the “biggest issue” after the Budget. And he has consistently said the Bank will take a steady approach to reducing interest rates at previous meetings.
Thomas Pugh, an economist at the consultancy RSM, said: “Ultimately, that means mortgage holders won’t be getting an early Christmas present from the BoE this year. We expect four cuts in 2025, meaning rates will finish the year at around 3.75 per cent, but the risks are weighted towards fewer rate cuts.”
Another complicating factor for policymakers is that national GDP – the main measure of economic growth – fell slightly in October. Higher interest rates tend to hamper GDP, meaning the contraction could make some of the Bank’s nine members of the Monetary Policy Committee more inclined to vote for a rate cut in December.
But economists have said the contraction in October GDP was down to people taking a wait-and-see approach ahead of the Budget policy decisions at the end of that month, and that growth would pick up again.
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