The Bank of England (BOE) is anticipated to keep interest rates unchanged in line with the Federal Reserve and European Central Bank. Despite a series of rate hikes implemented between December 2021 and August 2022, the BOE continues to grapple with inflation that has not yet returned to its 2% target. Officials are now adopting a more cautious approach as they evaluate the impact of previous rate increases.

Inflation Concerns

In September, headline inflation in the UK stood at 6.7% year over year, significantly surpassing the BOE's target. This inflationary trend is also slower to decelerate compared to the United States and Europe, where inflation rates reached 3.7% and 2.9% respectively. Meanwhile, core inflation, which excludes volatile food and energy prices, persistently remains high at 6.1% as of September. The most recent BOE forecast suggests that inflation will not return to the target until 2025.

Interest Rates and Economic Outlook

With the current interest rate at a 15-year high of 5.25%, it is likely to remain at this level for an extended period. However, Governor Andrew Bailey, who is set to speak at a press conference following the decision, is unlikely to explicitly state whether rate hikes are concluded. The weaker economic growth in the UK compared to the US increases the chances of a recession. The central bank expects the UK economy to expand by only 0.5% this year and next.

Similar to Jerome Powell of the Federal Reserve, Bailey is expected to emphasize the importance of keeping rates high while assessing the consequences of previous rate changes. He will likely maintain the option to raise rates if necessary.

Mixed Views on Future Interest Rates

BOE Chief Economist Huw Pill has expressed his preference for a gradual approach to interest rates, comparing the rate path to the flat-topped Table Mountain in South Africa. The steep ascent of the mountain represents the past rate hikes, while the long, flat top symbolizes a period of steady rates. However, some economists at ING believe that given the UK's struggling economy, the BOE may cut interest rates in the middle of next year to support economic growth.

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