The Bank of England, responsible for setting the interest rates, is predicted to maintain the standing rates at 5.25%, amidst the challenge of modulating the effects of higher rates on the UK economy. Escalating rates, currently at a record-high for 15 years, were previously introduced to dampen rapid price increases.
At midday, the Bank’s resolution will be publicized, with monetary markets betting a 92% probability that the status quo will prevail. Higher rates signal an increase in borrowing costs, such as loans and mortgages, while also offering more substantial returns on savings accounts.
In the plight against the UK’s above-average inflation, the Bank began to raise rates as of December 2021, exerting financial strain on households. Inflation remains over three times higher than the Bank’s 2% target, despite seeing a decrease from its topmost record in the last year.
Through raising borrowing costs, the Bank aspires to influence households to reduce their spending, causing businesses to slow their price increases consequently. However, raising rates too quickly poses a risk of overcorrection, with the potential to cause a recession.
Although the UK is not presently facing a recession, weak economic growth stands as a concern. The economy’s performance will likely play a critical role in the upcoming general election. The aftermath of the previous rate increases, initiated in December 2021, are also yet to fully materialize.
Furthermore, Bank of England’s governor, Andrew Bailey, expressed growing indications of the economy suffering due to higher rates. Recent economic data has led analysts to predict rates remaining unchanged for an impending second time.
Sandra Horsfield, an economist at Investec, acknowledges the possibility of a rate increase, but admits to the weakening case for further rate hikes. She attributed this prediction to recent economic patterns and the potential early signs of a looming recession.
In contrast, the Institute of Economic Affairs, a right-leaning think tank, advises the Bank to reduce rates to avert a recession. They highlighted rising insolvencies, withdrawal from households to meet higher repayments, difficulty in debt repayment from struggling companies, and a decline in mortgage lending due to the Bank’s excessively tight monetary stance, according to Trevor Williams who monitors the Bank’s decisions.
