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Borrowing costs expected to be held at near 16-year high for longer

UK borrowing costs are expected to be held at their nearly 16-year high for at least another month, as the Bank of England’s cautious policymakers await further signs that the cost-of-living crisis is easing.

Decision-makers on the Bank’s Monetary Policy Committee (MPC) are widely expected to keep interest rates at 5.25% for the fourth time in a row.

It would continue to take some of the pressure off borrowers who have seen costs go up steadily from lows of 0.1% at the end of 2021, to the highest rate since early 2008.

Inflation has dropped sharply in recent months, as fuel prices have come down and food price rises have slowed.

However, the rate of Consumer Prices Index (CPI) inflation rose to 4% in December, from 3.9% in November, the first time it had increased since February last year.

The surprise increase led economists to say it is unlikely that the Bank will look to cut interest rates – a tool they use to control inflation – any time soon.

Susannah Streeter, head of money and markets at Hargreaves Lansdown, said: “With inflation ticking back up in December, it’s likely to have quelled immediate urges from policymakers around the table for rate cuts any time soon.

“Given the ultra-cautious stance three of the nine members of the MPC have taken towards inflationary risks, having voted for a rate hike at the last meeting, the chances of a reduction in the base rate at this gathering look very slim indeed.”

But Andrew Goodwin, chief UK economist for Oxford Economics, said December’s surprise rise in inflation is “unlikely to worry the MPC too much”, because it was driven by an increase in tobacco duties and a jump in air fares which are more volatile measures.

Policymakers will instead be looking for “more reassurance that price and wage pressures are retreating to a target-consistent pace on a sustained basis before pressing the ‘cut’ button”, he said.

ECONOMY Inflation
(PA Graphics)

Average UK wage growth has outstripped the rate of inflation for five months in a row, according to official figures – good news for hard-pressed workers, but less so for policymakers who want to see that inflationary pressures are easing.

Philip Shaw, an economist for Investec Economics, said he thinks most MPC members will vote to hold interest rates at 5.25% on Thursday, due to “more concrete signs that inflation is coming down towards the 2% target and that the economy remained subdued”.

Investec thinks rates will not be cut until June, and will end the year at 4.5%.

Meanwhile, the Bank will publish its latest Monetary Policy Report at the same time as the rates decision, with its outlook for inflation set to be in sharp focus.

Some economists predict the Bank will move forward its projection for CPI falling to 2% to the middle of this year, rather than in 2025.

This would signal good news for households who have grappled with above-target price rises since the middle of 2021.