Bank of England Expected to Maintain Interest Rates Amid Inflation Uncertainty

Interest Rates and Inflation Outlook

By William Schomberg

Current Economic Conditions

LONDON, Feb 5 (Reuters) - The Bank of England is expected to keep interest rates on hold on Thursday and leave its options open about when it will cut them again as it waits to be sure that a weakening jobs market will push down on inflation pressures.

Market Reactions and Predictions

The BoE will keep its benchmark Bank Rate at 3.75% at the February meeting of the Monetary Policy Committee, according to the overwhelming majority of economists polled by Reuters.

Future Policy Considerations

Britain has the highest official borrowing costs among the world's big, rich economies. December's inflation reading of 3.4% was also the highest in the Group of Seven.

"Despite sluggish growth and a weakening labour market, the BoE will want further evidence that inflation is falling towards its 2% target," James Mashiter, fixed-income portfolio manager at asset management firm SEI, said.

Governor Andrew Bailey said after December's quarter-point rate cut that he expected inflation would fall to around the BoE's 2% target as soon as April or May, partly due to measures in finance minister Rachel Reeves' November budget.

The recent weakening in the value of the dollar against sterling, among other currencies, could help speed up that drop.

But much of the slowdown in inflation will be due to one-off factors and continued strong pay growth could mean it picks up.

ING economist James Smith said memories were fresh of inflation topping 11% in 2022 and a recent BoE survey showing wage growth expectations stuck at 3.7% would weigh on the MPC.

Recent official data suggests private-sector pay growth could fall soon to 3%, however, which would be consistent with the BoE's inflation target.

"The mantra this week is likely to be keeping options open and letting the data do the talking instead," Smith said.

The MPC's December cut was backed by only a narrow 5-4 vote. Investors are mostly betting on no move until April and possibly not until July, according to data from LSEG - a much slower pace than in 2025 when the BoE cut the Bank Rate four times.

Despite some tentative signs of a recovery among consumers and businesses, Britain's economy is struggling to pick up speed - frustrating Reeves and Prime Minister Keir Starmer.

There is also uncertainty among government bond investors about Starmer's ability to remain in Downing Street.

British 30-year gilt yields hit their highest since late November on Wednesday as Starmer faced criticism from within his Labour Party and opposition lawmakers about his short-lived appointment of Peter Mandelson as UK ambassador to the U.S. despite Mandelson's ties to sex offender Jeffrey Epstein.

So far, the MPC's rate-setters have mostly said they are likely to move cautiously as official borrowing costs approach a neutral level which they view as neither stimulating nor dragging on growth.

Some analysts fear that a rise in unemployment is likely to get worse. The National Institute of Economic and Social Research, a think tank, said on Wednesday the jobless rate would average 5.4% this year, the highest since 2015.

The main focus of investors at the BoE's policy announcement at 1200 GMT - and a press conference half an hour later - is likely to be on any changes to its messaging.

The MPC said in December that rates were "likely to continue on a gradual downward path" but it added "judgements around further policy easing will become a closer call".

(Writing by William Schomberg; Editing by Catherine Evans)