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UK interest rate cut a ‘sure bet’ amid faltering economic growth, say experts - PA.MEDIA
The cost of borrowing is expected to fall to its lowest point in more than 18 months this week.
Senior economists at the Bank of England will meet to decide whether to cut the UK’s base interest rate in the coming days, which currently sits at 4.75%.
Most experts predict they will announce a quarter point reduction to 4.5% at their announcement on Thursday February 6, continuing a series of cuts which started last summer.
The base rate helps dictate how expensive it is to take out a mortgage or a loan, as well as influencing the interest rates offered by banks on savings accounts.Hikes in recent years, designed to combat skyrocketing inflation, have left mortgage rates much higher than was normal for most of the last decade.
The base rate rose as high as 5.25% in late 2023, but the Bank’s policy makers cut it to 4.75% over the course of several months last year.
The Bank typically raises interest rates when inflation is high to discourage people from spending money, thereby slowing the rate of price rises.
Now, inflation – which measures how fast prices are rising across the economy – is 2.5% across the UK, much lower than the highs of recent years.
And economic growth is stagnating across the UK, leading to predictions of another rate cut, which would encourage more spending and stimulate the economy.
Thomas Pugh, an economist at the consulting firm RSM, said it is a “sure bet” that the Bank will cut rates to 4.5%.
However, he pointed to several signs that inflation could be on the way up again, giving policymakers a “dreaded trade-off”.
“The economy has clearly underperformed since the last set of forecasts by the Bank back in November,” but inflationary pressure is “now rising again”, with the main rate of inflation forecast to rise towards 3% over the spring months.
That is partly because of rising energy costs, as well as the effect of policies announced at the October Budget.
Chancellor Rachel Reeves raised national insurance contributions (NICs) for companies in October.
The policy is designed to give the Government more money to spend on public services like the NHS, but it is also expected to push up costs and contribute to rising inflation.
Chancellor Rachel Reeves raised company taxes at the most recent Budget (Peter Cziborra/PA)
The Bank’s Monetary Policy Committee, the group of nine economists who make the decision, will need to weigh up those two factors, he said.
When the economic growth is sluggish but inflation is rising, economists label it “stagflation”.
Matt Swannell, chief economic advisor to the EY Item Club, a forecasting group, said a quarter point cut is “highly likely” at the February meeting.
“But that does not take away from the longer term dilemma facing the Bank of England, as its latest set of projections are likely to show that upcoming growth will be weaker, but near-term inflation will be higher than when it met three months ago.”
