The Bank of England (BoE) finds itself at a crossroads as inflation dynamics complicate monetary policy decisions. Despite the recent dip in inflation, certain metrics, including core inflation and services inflation, have proven resistant to a downward trend. Analysts and market participants are now debating the likelihood of further rate cuts, as the BoE carefully balances inflationary pressures with economic growth considerations.
Current Inflation Trends and Market Expectations
In October 2024, core inflation (which excludes volatile items such as energy, food, alcohol, and tobacco) ticked up slightly to 3.3% year-on-year, while services inflation rose from 4.9% to 5%. These figures highlight persistent underlying price pressures despite broader inflation falling to 2.3%, still above the BoE’s 2% target.
Capital Economist analysts attribute this uptick to one-time events, such as a sharp rise in airfare costs. "Much of this overshoot in core and services inflation stems from temporary factors, not signs of stickier price pressures," their report states.
The market, however, remains cautious. Betting odds suggest the BoE will likely hold rates steady at 4.75% in its December meeting unless November inflation data, due on December 18, offers a significant downside surprise.
Global and Domestic Drivers of Inflation
The broader inflation picture is shaped by several factors:
UK Government Policy: Chancellor Rachel Reeves' £70 billion budget—financed through increased corporate taxes and borrowing—is expected to add upward pressure on prices in 2025.
Global Economic Conditions: The re-election of Donald Trump as U.S. president has injected uncertainty into global inflation trends, with proposed tax cuts and tariffs likely to exacerbate global price pressures.
Post-Pandemic Recovery: Central banks worldwide raised borrowing costs during the pandemic to combat inflation driven by supply chain disruptions and the energy crisis triggered by Russia’s invasion of Ukraine. While rates are now being cut, experts predict a slower trajectory back to pre-pandemic levels.
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The Path Ahead for the BoE
While another rate cut in 2025 remains on the table, analysts expect the pace of reductions to be more cautious. Monica George Michail, an economist at the National Institute for Economic and Social Research, explains, “The BoE will likely continue cutting rates in 2025, but at a slower pace, keeping rates elevated for longer to manage persistent inflationary pressures.”
With markets pricing in just two more quarter-point rate cuts next year—and a 40% chance of a third—the BoE faces a delicate balancing act. Policymakers must weigh the risk of reigniting inflation against the need to support economic activity.
The BoE’s approach to interest rates in 2024 and beyond will hinge on evolving inflation data and global economic trends. While one-time factors like airfare inflation may not signal entrenched price pressures, broader fiscal and geopolitical challenges suggest a slow path toward rate normalization. For now, the BoE seems poised to tread cautiously, maintaining its current policy stance as markets and households brace for a potentially bumpy economic recovery.
Source: Euronews
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