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The Bank of England plans to keep interest rates on hold this week as it looks for clear signs that wage growth and service inflation have cooled enough to allow borrowing costs to fall.
Financial markets overwhelmingly expect the central bank's benchmark interest rate to remain at 5.25% when the Monetary Policy Committee announces its latest decision on Thursday. After 14 consecutive interest rate hikes, interest rates have been left unchanged for five consecutive meetings.
Swap market pricing, which reflects expectations of future BoE interest rate levels, suggests the first cut will occur by August, with one or two further cuts to come before the end of the year.
The UK's prudent monetary policy this week Approach of major central banks Banks, including the Federal Reserve and the European Central Bank, have made it clear that they will only start cutting interest rates when there is sufficient evidence that inflation will fall permanently.
E.C.B. kept Interest rates will remain unchanged this month, but the Fed Inclined I'll do the same thing on Wednesday.
„At this point, the word 'not yet' is the unifying message from the Bank of England, the Federal Reserve and the ECB,“ said Sandra Horsfield, an economist at Investec.
![A line graph of annual earnings growth excluding bonuses before and after inflation shows that UK wage growth has slowed but remains high.](https://www.ft.com/__origami/service/image/v2/images/raw/https%3A%2F%2Fd6c748xw2pzm8.cloudfront.net%2Fprod%2F9c4b1780-e2bc-11ee-8784-ffe65e74e71a-standard.png?source=next-article&fit=scale-down&quality=highest&width=700&dpr=1)
![A line graph of annual earnings growth excluding bonuses before and after inflation shows that UK wage growth has slowed but remains high.](https://www.ft.com/__origami/service/image/v2/images/raw/https%3A%2F%2Fd6c748xw2pzm8.cloudfront.net%2Fprod%2F9c4b1780-e2bc-11ee-8784-ffe65e74e71a-standard.png?source=next-article&fit=scale-down&quality=highest&width=700&dpr=1)
This month's official data pointed out softer The situation in the UK labor market has been affected by a slight slowdown in wage growth, a decline in the number of vacancies, slower growth in paid employment and an increase in the number of people applying for unemployment benefits.
Excluding bonuses, annual wage growth slowed to 6.1% in the three months to January from 6.2% previously.
However, the BoE is wary of placing too much emphasis on single labor market releases given the continuing labor market situation. quality issues Collaboration with research by the National Bureau of Statistics. In any case, the pace of wage growth is still well above the rate consistent with the central bank's 2% inflation target, analysts said.
A key issue for the MPC will be the shape of the wage agreements that employers entered into in March and April. Median wage growth across the economy remained steady at 5% in the three months to January, according to an analysis of wage bonuses by Incomes Data Research.
However, a quarter of the 63 transactions examined were worth more than 6%. A key factor for April is the upcoming 9.8% rise in the National Living Wage. The increase will also have a knock-on effect on some employees' pay, which is slightly above the legal minimum wage.
Andrew Goodwin, an economist at consultancy Oxford Economics, said the latest data did not suggest wages were likely to fall below the BoE's first-quarter forecast of 5.7%. „The majority of MPCs will want to see more data on payroll settlements in the new year before committing to a rate cut,“ he added.
There is another benefit to waiting. That is to give the central bank time to compile a set of economic forecasts, next scheduled for its May meeting.
Central bank officials are also keeping a close eye on growth in service prices, which rose 6.5% in January from a year earlier. They believe that the prices charged by the UK's large services sector are a key indicator of underlying price pressures in the economy.
As part of this effort, the MPC has mainly supported interest rate increases from November 2021 to last summer. to reduce inflationthe last time the nine members met in February, the committee was split into three directions.
While the two policymakers Katherine Mann and Jonathan Haskell opted to raise interest rates to 5.5%. Fellow external commissioner Swati Dhingra called for immediate cuts. The majority voted in favor without making any changes.
After the meeting, central bank governor Andrew Bailey said the bank had seen „good news on inflation over the past few months“. But he cautioned: „Before cutting rates, we need to see further evidence that inflation has fallen to our 2% target and remains there.“
Pressure to cut interest rates is likely to mount in the coming months as headline inflation falls quickly to its 2% target thanks to falling energy prices. Consumer price inflation is currently 4 percent, compared to a peak of more than 11 percent in 2022.
![Line graph of year-on-year change in consumer price index showing that the UK's headline inflation rate has fallen significantly from its peak](https://www.ft.com/__origami/service/image/v2/images/raw/https%3A%2F%2Fd6c748xw2pzm8.cloudfront.net%2Fprod%2F328e7fc0-e2bd-11ee-94c1-d7a02b82eefb-standard.png?source=next-article&fit=scale-down&quality=highest&width=700&dpr=1)
![Line graph of year-on-year change in consumer price index showing that the UK's headline inflation rate has fallen significantly from its peak](https://www.ft.com/__origami/service/image/v2/images/raw/https%3A%2F%2Fd6c748xw2pzm8.cloudfront.net%2Fprod%2F328e7fc0-e2bd-11ee-94c1-d7a02b82eefb-standard.png?source=next-article&fit=scale-down&quality=highest&width=700&dpr=1)
Official inflation data for February is due to be released on Wednesday, with headline CPI inflation expected to fall further to 3.6%, according to a Reuters poll of analysts.
In February, the Bank of England predicted that inflation would bottom out in the second quarter and then perhaps start trending upward in the second half of 2024, underscoring the central bank's argument that policy should remain restrained. is strengthening.
Other forecasters, including fiscal watchdog the Office for Budget Responsibility, question the idea that CPI inflation will rebound anytime soon.
The market expects the Fed and ECB to announce interest rate cuts this summer. Bank of England officials have been reluctant about the timing of the first rate cut, with chief economist Hugh Pill recently claiming he believes the timing of the first rate cut is still „a long way off“.
Alan Monks, UK economist at investment bank J.P. Morgan, said of a rate cut: „The BoE will probably need more convincing to actually start doing that.“ “The aim is to avoid the possibility of retracing that path once we start easing, and we may struggle to contain expectations once easing begins.”