Commenting on the Bank of England’s interest rate hold today, Chris Arcari, Head of Capital Markets, Hymans Robertson, said:

“The Bank hasn’t cut interest rates this month because it’s being cautious, with lingering concerns about some elements of domestically-driven inflation. But it recognises the strong progress on inflation largely driven by supply-side developments, and agrees with consensus forecasts that headline CPI inflation will fall below the 2% target by or in the summer. And this comes at a time where UK real growth, realised and forecast, is very weak."

Explaining the background to the Bank’s decision, Chris said:

• “Sectoral divergence in economic activity potentially highlights a key risk to the outlook.
• Further declines in headline inflation should enable the major central banks to start reducing interest rates in the second half of 2024. Indeed, if consensus forecasts are correct, and UK inflation falls below target in the summer, current interest rate expectations might not be that unreasonable.
• However, we are likely to see the Bank of England retain a degree of caution. Tight labour markets and strong wage and services inflation – signs of genuine, domestically-driven inflation pressures - mean the pace of decline is likely to slow and core inflation is likely to take a lot longer to fall than headline measures.
• Easy wins from falling energy and moderating food and goods prices – which arguably owe more to global supply factors a central bank can do little about - are largely in the rear-view mirror. And here, too, there are risks, with developments in the Red Sea posing a threat to global supply chains and oil prices. However, for now, pandemic-era inflation feels unlikely given weak manufacturing activity and goods demand and a more manageable rise in freight costs.”