Business

Economists expect rates to hold on Thursday despite fall in inflation

The inflation rate dropped slightly faster than expected in February, hitting 3.4% during the month, the lowest for two and a half years.

Andrew Bailey, governor of the Bank of England
Andrew Bailey, governor of the Bank of England (Justin Tallis/PA)

A small but pleasant surprise in inflation data released on Wednesday is unlikely to change the calculations as the Bank of England decides whether to change interest rates again, economists have said.

The inflation rate dropped slightly faster than expected in February, hitting 3.4% during the month, the lowest for two and a half years.

That is good news for the Bank of England, and will be welcomed by its decision-makers on the Monetary Policy Committee (MPC).

ECONOMY Inflation (PA Graphics/Press Association Images)

But analysts from BNP Paribas said on Wednesday that it was unlikely to make the MPC vote any differently from how it would otherwise.

They still expect rates to be held steady, at 5.25%, during this week’s meeting, the result of which will be announced at midday on Thursday.

“We do not think that this morning’s data will move the needle for the BoE meeting tomorrow,” said Matthew Swannell, Dani Stoilova and Gerardo Martinez at BNP Paribas.

“One area of the focus will be the vote split, with the largest uncertainty around whether hawk Jonathan Haskel changes his vote from a 25bp (base point) vote hike to a hold.

“By his own admission, his February vote for a hike was ‘finely balanced’, so it is difficult to call how he will vote tomorrow.

“Our expectation is that despite the BoE’s core services inflation dropping in February – which it would seem Haskel attaches some weight to – he will need further evidence of its being on a downwards trajectory before adjusting his vote. We expect an unchanged vote split.”

That would mean that only one of the nine-person committee is likely to think that conditions are right for a cut.

UK interest rates (PA Graphics/Press Association Images)

Economists generally agree that cuts to the interest rate will come later this year – the Bank has signalled as much recently too – but they are less sure when the cuts will come.

It would be the reversal of a four-year trend of rates being either hiked or kept unchanged at every Bank meeting.

In February, only Swati Dhingra voted to cut rates. Two of her colleagues on the nine-person MPC voted for a rise, but the majority thought that rates should stay unchanged.

“The direction of travel for UK inflation is certainly encouraging and supports the case for a policy easing in the near future,” said Ellie Henderson, an analyst at Investec.

“Our base case is for a first interest rate reduction in June.

“Furthermore, it is not just about actual inflation, expectations play a strong part too.

“As inflation expectations fall, but the nominal policy rate remains constant, the real rate of interest rises, resulting in a tightening in monetary policy, without the Bank actually changing its stance.

“The MPC will have that in mind when deciding on the appropriate time to cut interest rates.

“But for the meeting tomorrow, today’s inflation numbers do not change our view, first set out in our preview, that the MPC is likely to convey the message that it has an eye on easing policy rates this year, but the hurdle to do so has not yet been overcome.”