The Bank of England’s decision to maintain the interest rate at 4% has stirred discussions among economists and homeowners alike. The move followed a close 7-3 vote by the central bank’s interest rate setting body, which is convinced that inflation has hit its high point. Policymakers are getting ready to evaluate the impact of their decisions at their scheduled mid-December meeting. At the same time, Governor Andrew Bailey will have an equally critical decision whether to take a more generous cut or remain conservative.
How Governor Bailey lands in his next deliberations will depend on a number of factors, among them the fragility of today’s fierce consumer spending and the tight labor market. The Bank’s rate setters are on alert for signs in upcoming data that may vindicate their position before the first of what would be several expected future rate cuts. Economists forecast a cut starting as soon as February, if not sooner at the December meeting. The persistence of elevated rates poses challenges for hundreds of thousands of homeowners who may face increasing costs when renewing their mortgages.
Now, signs point to increasing reticence on the part of consumers in a more cautious economic climate. Private sector experts now estimate that the economy will grow by 1.2% by 2026. Yet, this projection is a step down from the 1.5% forecasted for this fiscal year. This is one place Treasury will probably be very unhappy with such a growth slowdown. It would increasingly complicate Bailey’s decision-making process. The unexpected softness seen in the labor market might be affecting his calculus about a potential rate cut.
As borrowers continue to look for clouds with silver linings, they should get ready for a long slog back to pre-pandemic rates. Any such “gifts” in terms of lower rates predicted are unlikely to materialize until 2026, the forecasts say. Hardship is everywhere and inflation is punishing households. The Bank’s restrained positioning reflects a greater concern about cutting into economic stability.