The Bank of England is expected to keep the base rate at 4.5% next week, as rate-setters weigh up the UK economy, fears of a global trade war and the Chancellor’s Spring Statement.
The economy contracted by 0.1% in January, which was weaker than forecast, driven by a decline in manufacturing, according to official figures.
Economists had predicted growth of 0.1% in January, after a 0.4% uplift in December.
But a less volatile three-month reading shows the economy was estimated to have grown by 0.2% up to January.
Deutsche Bank senior UK economist Sanjay Raja says the central bank’s Monetary Policy Committee’s “’gradual and careful’ approach in our view, leans against the need for back-to-back rate cuts” after a quarter-point cut in February.
This comes after a warning that a move by US President Donald Trump to impose tariffs on UK imports, would cause “substantial” damage to British growth and lift prices, from Bank of England governor Andrew Bailey when he appeared in front of the Treasury Select Committee this month.
Deutsche Bank predicts a 7-2 vote split in favour of hold on Thursday, with external members Swati Dhingra and Catherine Mann likely to vote for a half-point reduction “given their views of demand-based weakness emerging in the UK economy”.
Chancellor Rachel Reeves is expected to cut welfare spending to boost the defence budget and unveil further growth measures in her Spring Statement on 26 March.
Last month, Dhingra highlighted that policymakers were clashing at meetings over whether “gradual” base rate reductions should limit them to one cut every three months.
EY ITEM Club chief economic advisor Matt Swannell says: “We don’t see any reason for the majority of the Monetary Policy Committee to want to break from its established tempo of cutting Bank rate at every other meeting, although we do still expect some committee members that are more concerned around the growth outlook to vote in favour of another cut in interest rates.”
Swannell adds: “Having been knocked off course in the spring through each of the last two years, it seems unlikely that the Bank of England will consider deviating from its current cut-hold tempo until at least August.
“By then, the committee will know more about the impacts of changes in the National Living Wage, employers’ NICs and international trade policy, and will also have seen and analysed the government’s latest tax and spending plans.”
But Deutsche Bank expects a faster pace, forecasting reductions in May, August, November and December, leaving Bank rate at 3.5% by the end of the year.
