The Bank of England has maintained a hawkish outlook on interest rates, even as the forthcoming Budget is anticipated to reduce inflation. During a Treasury Select Committee meeting, Bank staff concurred with the Office for Budget Responsibility (OBR) that measures outlined in Rachel Reeves’ November statement could lower headline inflation by 0.5 percentage points through a “purely mechanical effect”.
Key actions contributing to reduced inflation include the removal of green levies from household energy bills and a freeze on fuel duty and rail fares next year. However, Chief Economist Huw Pill suggested that policymakers might need to “look through” these measures, considering other economic factors that could influence decisions.
Ahead of the Monetary Policy Committee’s (MPC) meeting on 18 December, where interest rates might be adjusted from the current four per cent, market expectations have priced in a 25 basis point cut. Nonetheless, Oxford Economics analysts have indicated the decision could be closer than anticipated, with Governor Andrew Bailey possibly casting a deciding vote in a split decision.
Earlier, Deputy Governor Ben Broadbent expressed concerns about high inflation expectations among consumers and businesses, which could drive price growth higher than forecasted. He emphasised the importance of structural factors, noting pressures on economic resources and questioning the current restrictiveness of monetary policy.
External MPC member Catherine Mann echoed these concerns, highlighting “inflation persistence” as a primary issue. She warned that administered prices could rise more than expected from April, affecting both public and private sectors. Mann also pointed to behavioural changes resulting from prolonged inflation above target levels, such as firms maintaining prices despite reduced sales and consumers anticipating higher price growth in their spending plans.
Mann further noted that the labour market had not been as dire as some economists predicted, with public sector employment helping to counteract private sector weaknesses.
Interest rate doves, including Deputy Governor Dave Ramsden and external member Swati Dhingra, who previously voted for a rate cut, acknowledged evidence of falling inflation. However, Ramsden cautioned against underestimating wage growth persistence. He also addressed concerns from Tory MPs about potential impacts of Budget leaks on bond markets, asserting that market volatility is a regular occurrence and that recent fluctuations were less severe than those seen in past fiscal statements.
Mann added that prolonged Budget speculation had negatively affected consumer and business confidence, underscoring the broader economic implications of fiscal policy announcements.
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