The Bank of England is set to keep interest rates unchanged this week as it hunts for clearer signs that pay growth and services inflation are cooling sufficiently to permit a cut in the cost of borrowing.
Financial markets are overwhelmingly betting that the BoE’s benchmark rate will be kept at 5.25 per cent when the Monetary Policy Committee announces its latest decision on Thursday. It would mark the fifth successive meeting that the rate is held unchanged, after 14 consecutive increases.
Pricing in the swaps market — which reflects predictions of the future level of BoE interest rates — suggests the first downward move will only come by August, with one or two further cuts by the end of the year.
Steady monetary policy in the UK this week would chime with the approach of big central banks including the Federal Reserve and the European Central Bank, which are making it clear they will start reducing rates only when they have enough evidence that inflation is heading durably lower.
The ECB kept rates unchanged this month, while the Fed is tipped to do the same on Wednesday.
“‘Not yet’ is the key phrase that unites the message of the Bank of England, the Federal Reserve and the ECB at present,” said Sandra Horsfield, economist at Investec.
Official data this month pointed to softer conditions in the UK labour market, as slightly slower wage growth combined with a fall in job vacancies, stalling growth in the number of payrolled employees, and an increase in the number of claimants for jobless benefits.
Excluding bonuses, annual wage growth slowed to 6.1 per cent in the three months to January, from 6.2 per cent previously.
But the BoE is wary of putting too much weight on single labour market releases given continued quality problems with Office for National Statistics surveys. In any case the pace of pay growth remained well above levels consistent with the central bank’s 2 per cent inflation target, analysts said.
A crucial question for the MPC will be the shape of pay deals struck by employers in March and April. The median pay increase across the economy has held steady at 5 per cent in the three months to January, according to analysis of pay awards by Incomes Data Research.
