The Bank of England is set to keep interest rates on hold today despite mounting alarm at the stalling economy.
The Monetary Policy Committee is expected to keep the base rate at 4.75 per cent when its latest decision is announced at noon.
The verdict is due after figures showed inflation increased in November for the second month in a row, with wages also gathering pace again.
But at the same time there are fears that UK plc could slip into recession following Rachel Reeves‘ huge Budget tax raid.
The economy has contracted for two consecutive months, while closely-watched business surveys have shown activity flatlining.
Interest rates, which influence how much banks charge for loans and mortgages, are used as a tool by the central bank to keep inflation at its 2 per cent target level.
However, after drifting downwards from historic peaks the headline CPI hit to 2.3 per cent in October and 2.6 per cent in November.
Most economists think the latest data, and the prospect of price pressures increasing in the coming months, will persuade the Bank’s policymakers to hold interest rates at their current level.
The rate was reduced in August and again in November, and until relatively recently there were hopes of another drop before Christmas.
Traders in the financial markets are expecting about a 10 per cent chance of a rate cut, Investec Economics said on Wednesday.
Rob Wood, chief UK economist for Pantheon Macroeconomics, said: ‘Inflation rising above the MPC’s (Monetary Policy Committee’s) target is one reason why we expect rate-setters to cut interest rates gradually.’
He said policymakers would have to factor into their decision ‘stronger-than-expected inflation and wage growth, offsetting weaker GDP (gross domestic product) growth signals’.
He added that services inflation – which tracks prices across industries including hospitality and culture, real estate, financial services and education – ‘remains too high’ for overall inflation to return to target.
Governor Andrew Bailey and the rest of the MPC are making the latest decision on interest rates today
Rob Morgan, chief investment analyst at Charles Stanley, said heightened uncertainty over the economic outlook meant the Bank ‘will be wary of loosening too much too soon’.
‘Especially now fiscal policies revealed in the Budget could add fuel to the inflationary fire into the New Year,’ he said.
‘The additional costs for employers in the form of higher national insurance and minimum wage rises looks set to reinforce the trend of escalating costs in the services sector.
‘Although employers might take some of the hit with lower corporate margins, much of the impact could take the form of higher consumer prices.’
