The Bank of England’s interest rate setting committee is poised to make some very important statements. They will be convening in mid-December to determine the direction of future interest rate increases. Can this develop into a new paradigm with higher interest rates? Policymakers will have to reckon with the consequences of historic economic policies and decide whether inflation has really peaked, as some panelists favoring that now.
Andrew Bailey’s priority must be to ensure we have clear confirmation that inflation has peaked. Only then should he entertain thoughts of future rate cuts. While the rate will remain at 4% permanently, the close call approval still raises concerns. This result illustrates the fact that the rate setters have different views of the world. Economists largely expect that if rates don’t go down in December, we’re looking at a likely cut in February 2024.
Consumer spending is still very nervous, mirroring the mood of the macro economy. The economy would expand by only 1.2% in 2026. This new forecast is a step down from the 1.5% national growth expected for this year. This expected growth rate will likely not be enough to please the Treasury, who are surely hoping for more robust economic signs.
The greater persistence in weakness in the labor market will likely be a consideration shaping the Bank of England’s decision-making over coming months. Rate setters will continue to look at the monthly data on inflation, employment, and other indications to inform their decisions as the economy evolves. Hundreds of thousands of current homeowners may face worsening affordability upon mortgage renewal with sustained high-interest rates. This confluence of factors is forcing close examination of consumer sentiment and financial health.
As those debates play out, Bailey has found himself in a tug-of-war between two legendary figures. He probably wants to do a lot to help borrowers, but he understands the dangers associated with cutting rates prematurely. Borrowers cling to their hope for more borrower-friendly terms in 2026, but even those are likely to be felt only slowly over time.