The Bank of England is poised to offer Brits some relief and boost the stalling economy today with a cut to interest rates.
Markets are convinced the Monetary Policy Committee will reduce the level from 4.75 per cent to 4.5 per cent when the decision is announced at noon.
That would be the lowest point in more than 18 months – giving mortgage-payers much-needed breathing space.
However, lowering borrowing costs will underline the extent of alarm about the economic slowdown in the UK after Rachel Reeves’ huge Budget tax raid.
The need to kickstart activity looks set to outweigh fears that Donald Trump’s trade tariffs will put upwards pressure on inflation – something Threadneedle Street uses interest rates to counter.
The Chancellor has been scrambling to find policies that can drive growth, but businesses have warned they face cutting jobs and pushing up prices after her national insurance hike.
There are also concerns that Ms Reeves will have to increase the burden again or cut public spending to balance the books in the coming months.
The Bank of England is likely to give a crucial indicator of how likely that is with updated forecasts for the economy being released alongside the rates announcement at lunchtime.
The Bank of England in London is pictured yesterday ahead of the base rate announcement
The base rate helps dictate how expensive it is to take out a mortgage or a loan, while it also influences the interest rates offered by banks on savings accounts.
Hikes in recent years, designed to combat skyrocketing inflation, have left mortgage rates much higher than was normal for most of the last decade.
The base rate rose as high as 5.25 per cent in late 2023, but the Bank’s policymakers cut it to 4.75 per cent over the course of several months last year.
The last time the rate was set at 4.5 per cent was in May 2023.
The Bank typically raises interest rates when inflation is high to discourage people from spending money, thereby slowing the rate of price rises.
Now, inflation – which measures how fast prices are rising across the economy – is much lower than the highs of recent years, at 2.5 per cent per year.
Meanwhile, economic growth is stagnating across the UK, leading to predictions of another rate cut, which would encourage more spending and stimulate the economy.
However, some recent announcements have indicated that inflation could be on the way back up, albeit more gradually, posing a potential problem for the Bank.
Yesterday, a survey of companies in the service sector, which includes everything from shops and pubs to finance firms and lawyers, found that cost inflation in the industry nudged up in January.
Most economists think these signs of rising inflation are unlikely to put policymakers off cutting rates today, but it could lead them to be more cautious at future meetings in March and May.
Chancellor Rachel Reeves on a visit to Premier Modular in Driffield, East Yorkshire, last week
Chris Arcari, an analyst at finance firm Hymans Robertson, said the Bank will have to ‘walk a tightrope’ when it comes to more rate cuts later this year.
He said that while the economy currently leaves space for a ‘modest reduction’, the Bank will likely ‘adopt cautious messaging’ about the future.
The rise in cost inflation is partly to do with the effect of policies announced at the October Budget.
Chancellor Ms Reeves raised national insurance contributions for companies in October.
The move was designed to give the Government more money to spend on public services like the NHS.
But some companies have complained it is pushing up costs and contributing to rising inflation.
Matthew Ryan, an analyst at finance firm Ebury, added that with economic growth stagnating but inflation rising, the Bank ‘will have to make a judgment call about which risk is likely to dominate over the course of the year’.
