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  • Writer's pictureDaniel Campbell

Whats next for the Bank of England base rate after January CPI rise?

Base rate predictions 2024 image

Economic pundits are still foreseeing a potential decrease in the Bank of England's base interest rate in the months ahead, notwithstanding the recent increase in inflation. In December 2023, UK inflation climbed to 4%, surpassing market forecasts and marking the first uptick since February 2023.

The Bank of England had hiked interest rates last year to counter the swift ascent in prices, particularly impacting household budgets, with energy costs proving to be a stumbling block for many.

While the latest inflation figures sparked concerns about a postponed reduction in the base rate, experts now assert that the marginal inflation increase is unlikely to reshape the broader economic landscape. Julian Jessop, an economics fellow at the Institute of Economic Affairs, indicates that inflation is projected to drop to 2% in April, with financial markets persisting in factoring in substantial rate cuts later in the year.

Jessop explains that the December uptick in inflation was fueled by transient factors such as shifts in tobacco duties, airfares, and segments of 'recreation and culture.' He also underscores a cooling labor market and tepid growth in both the money supply and credit.

Oxford Economics analysts, anticipating a downsizing of the Bank of England's inflation projections in February, believe that the bank is gearing up for rate reductions. Ruth Gregory from Capital Economics anticipates inflation falling below the bank's 2% target in April, putting policymakers in a position to contemplate interest rate cuts by June.

Sarah Coles, head of personal finance at Hargreaves Lansdown, aligns with the downward trajectory in interest rates but cautions against potential hurdles, such as conflicts in the Red Sea causing supply shortages and subsequent price hikes.

Shifting focus to economic growth, ING analysts predict restrained yet positive quarterly GDP growth in 2024. They emphasise the Bank of England's scrutiny of services inflation and wage growth, coupled with the scale of any fiscal stimulus in the March Budget, as factors determining the timing of rate cuts. ING's baseline scenario presently suggests a first-rate cut in August, with an acknowledgment of the possibility of an earlier adjustment if spring tax cuts are conservative or if inflation figures fall below expectations in the coming months.

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