The Bank of England’s MPC is prepared to release minority opinions with its majority vote on interest rates. Enacting this move would provide an early clue as to what’s coming from the bank’s future monetary wizardry. As inflation continues to be a serious issue, the committee is under heavy scrutiny with mixed signals from the economy.
As of September, the inflation rate is 3.8%, well above the Bank’s target rate of 2%. Though this is a shocking figure, it was less than what many economists were expecting. Food inflation The pace of food and drink price rises has moderated markedly. This much-welcomed slowdown should come as a huge relief to consumers who have faced massive inflation over the past year.
Even with these conflicting signals, there is still a sense of “demoralisation” among savings, says Rachel Springall from Moneyfacts. She emphasized the effect of declining returns on people’s savings during this time of persistent high inflation. With the continued inflation sapping the value of any hard won savings, depositor frustration is rapidly rising.
As lenders respond to this challenging environment, most have started to lower interest rates on new fixed deals in order to court borrowers. No doubt this trend is in expectation of some future central bank rate cuts. Danni Hewson from AJ Bell pointed to a fascinating trend. In response, the market has assigned a one-in-three chance of the first cut to 3.75% come December.
“The odds are still firmly in favour of a hold.” – Danni Hewson
According to Hewson, large increases in taxation would make a stronger argument for a tax reduction. He promised that these tax hikes would not be inflationary. And again, the market is preparing for a major change in the Bank’s interest rate policy. Read More Andrew Bailey, the Bank of England’s new governor, has already hinted that more cuts are coming.
When it came to future cuts, Bailey warned that the pace would be “much murkier.” This uncertainty is reflected within the MPC itself, where a split vote is anticipated among its nine members regarding future rate adjustments. The deepening divide of opinions can only complicate a more difficult decision as the committee considers their moves.
Rachel Reeves, shadow chancellor Underlying the Bank’s current priorities controlling our long-term monetary policy direction Rachel Reeves on Newsnight last week.
“Will be focused on getting inflation falling and creating the conditions for interest rate cuts.” – Rachel Reeves
The MPC’s next meeting will be pivotal as it re-assesses these economic trends and what they mean for the direction of interest rates. How they decide will have a very real effect on borrowers. They will deeply hurt savers who are suffering from low returns and high inflation.