BoE to hold key rate despite slow economic growth, high inflation

The UK's central bank is set to keep interest rates on hold later Thursday as inflation has moved further above its target rate, even though the British economy is flatlining at best.

The nine-member Monetary Policy Committee is widely expected to keep the bank's main interest rate unchanged at 4.75 per cent in the wake of figures showing inflation rising to 2.6 per cent, further above the target of 2 per cent.

With price pressures elevated in the crucial services sector, which accounts for around 80 per cent of the UK economy, and wages strong, there are few indications that inflation will get back towards the target anytime soon. As a result, the rate-setting panel, which last cut its key rate in November, is set to take a cautious stance, as lower borrowing rates could stoke inflation.

That's a disappointment for many struggling sectors in the UK economy that would be helped by lower interest rates in an environment of paltry growth in fact the British economy has contracted for two months in a row.

Persistent price pressures will prevent the Bank of England from responding to flat output and falling employment by cutting interest rates, said Andrew Wishart, an economist at Berenberg Bank.

Few economists think interest rates will drop dramatically in 2025 either. It's a similar picture in the US, where the Federal Reserve reined in expectations Wednesday of reductions next year after its latest rate cut.

Critics argue that the new Labour government's first budget in October has both elevated inflation pressures while also damping down on growth. A big increase in business taxes may see firms try to offset the additional costs by raising prices or cutting down on hiring. The government argues that it needed to raise taxes to shore up public finances and inject money into cash-starved public services.

Still, inflation in the UK and across the world is far lower than it was a couple of years ago, partly because central banks dramatically increased borrowing costs from near zero during the coronavirus pandemic when prices started to shoot up, first as a result of supply chain issues and then because of Russia's full-scale invasion of Ukraine which pushed up energy costs.

As inflation rates have fallen from multi-decade highs, the central banks have started cutting interest rates, though few, if any, economists think that rates will fall back to the super-low levels that persisted in the years after the global financial crisis of 2008-2009.