Bank of England to make interest rates announcement tomorrow - what to expect

Economists have predicted what will happen with interest rates as we move into the new year

The Bank of England will announce its review of the base rate later this week.

The Monetary Policy Committee (MPC) will meet on Thursday, December 14, where it will decide on whether or not it should raise interest rates, which help dictate mortgage rates set by banks. Previously, the Bank decided to keep interest rates at the same level of 5.25 per cent.

The same decision was also made in September, which finally saw a break in the trend of interest rates rising. The central bank had hiked interest rates at 14 consecutive meetings until they peaked at 5.25%.

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During the last meeting, the MPC said: "Since the MPC’s previous meeting, long-term government bond yields have increased across advanced economies. GDP growth has been stronger than expected in the United States.

"Underlying inflationary pressures in advanced economies remain elevated. Following events in the Middle East, the oil futures curve has risen somewhat while gas futures prices are little changed."

What will happen to interest rates this time?

The Bank will confirm its decision on Thursday at around noon. However, economists have predicted that rates will remain unchanged for the third time.

Recent positive changes to inflation are likely to give the MPC a more positive outlook towards the economy. Inflation dropped from 6.7 per cent in September to 4.6 per cent in October, a downturn which was mainly influenced by cheaper energy prices.

Since then, no major economic events have taken place, which means there's a good chance interest rates will remain untouched yet again this week. However, we can't say for certain until after the MPC's meeting.

If rates remain the same, it means mortgage-payers won't see any increases to their payments, however, they will continue to pay the relatively high rates compared to pre-pandemic levels where interest was close to zero per cent.

Speaking ahead of the decision earlier this week, Martin Beck, chief economic advisor to the EY Item Club, said: “December’s MPC meeting will almost certainly prove the third in succession to deliver no change in interest rates. There’s been nothing in the way of significant economic surprises over the last four weeks and inflation and pay growth have slowed (the former by more than the Bank of England expected).”

In addition, new figures released today showed that the UK economy shrank in October as the manufacturing and construction sectors were hit by poor weather. Gross domestic product (GDP) is thought to have fallen 0.3% during the month, down from 0.2% growth in September, the Office for National Statistics (ONS) said. The news is likely to make decision-makers even more certain that rates are high enough to be “restrictive” and dampen the economy.

Reacting to the new figures, Ruth Gregory, deputy chief UK economist at Capital Economics, told BBC Radio 4’s Today programme: “I think my sense is that this won’t move the dial too much for the Bank of England’s meeting tomorrow. The bank will almost certainly keep interest rates unchanged at 5.25%.”

Chancellor Jeremy Hunt said: “It is inevitable GDP will be subdued whilst interest rates are doing their job to bring down inflation. But the big reductions in business taxation announced in the autumn statement mean the economy is now well placed to start growing again.”

When will interest rates go down again?

Recent moves to hold the interest rate and signs of cooling inflation and subdued economic activity have stoked expectations that rates could be reduced in the first half of next year. However, the Bank’s governor, Andrew Bailey, and other members of the MPC, have indicated rates will remain where they are for some time.

At Parliament’s Treasury Committee last month, Mr Bailey suggested the threat of UK inflation is being underestimated and said the Bank is still focused on concerns over persistent inflation. He indicated that inflation in the services sector, where most Britons spend their money, is likely to remain at around 6% through the start of 2024.

James Smith, developed markets economist at ING, said he therefore expects the Bank to reiterate this message. He said: “Markets are pricing three rate cuts in 2024 and we doubt the Bank will be too happy about that. Expect policymakers to reiterate that rates need to stay restrictive for some time. We only get a statement and minutes on Thursday, and no press conference or forecasts, so the opportunity to shift the messaging is fairly limited.”

Some economists have previously predicted that the Bank will move to reduce borrowing costs before next summer as a stagnating economy brings inflation down further.