Bank of England expected to hold rates steady

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The Bank of England’s monetary policy is scheduled for today and marks the final policy meeting for this year. Following the central bank’s decision to hike interest rates at the November meeting, no changes are expected this month.

At the previous meeting, the Bank of England’s MPC voted 7-2 to hike interest rates. This was the first rate hike in nearly a decade, in a bid to cool off surging inflation.

Consumer prices in the UK remained above the BoE’s 2% inflation target rate while wage growth continued to lag behind.

For the markets, it will be an important event despite the central bank not hiking rates this week. For the most part, investors will be keen to learn whether the rate hike in November was a “one and done” deal.

BoE officials have however given hints that the central bank was looking to hike rates two more times in the next three year period. This is expected to see the UK interest rates hit 1% by the year 2020. However, for the short term, economists expect to see no further rate hikes coming from the Bank of England at least for the year ahead.

This week’s BoE’s meeting comes amid mixed reports from the economy. Activity in the manufacturing sector was seen rising with the manufacturing PMI hitting the highest level in a year. On the contrary, services PMI index fell.

The contrasting levels of activity come amid the volatility in the Pound sterling’s exchange rate as well inflation. Services sector was seen rising prices last month which grew at the fastest pace in a decade. This price increase eventually resulted in new orders taking a hit.

On the economic growth, there was also some uncertainty amid weak forecasts. The UK’s Office for Budget Responsibility slashed growth forecasts over the next five-year period.

Last week, in an independent survey, consumers in the UK feared that inflation will remain persistently high. The survey also showed that consumers expect the central bank to continue with rate hikes in response.

The poll that was conducted by the Bank of England showed that inflation expectations stood at the highest level in four years. The survey showed that inflation is expected to remain around 2.9% in the next two years, while five year inflation expectations rose to 3.5%.

UK November Inflation rises

Ahead of the BoE’s meeting, the monthly inflation report for the month of November showed that consumer prices once again increased during the month. In October, consumer prices were steady at 3.0% while in November the consumer price index accelerated to 3.1%.

The core inflation rate was unchanged at 2.7%, but there was evidence of further price pressures building up. The PPI input was seen rising 1.8%, beating forecasts of 1.6% increase and accelerating from 1.0% in October.

UK unemployment rate steady

On Wednesday, the monthly jobs report data showed that the unemployment rate remained at the lowest levels in nearly four decades. Data from the ONS showed that the unemployment rate was unchanged at 4.3%. The number of unemployment fell by 26,000 in the three months to July period.

Wage growth, which has been an important data point in light of higher inflation rose 2.5% including bonuses and 2.3% excluding bonuses. However, wage growth continued to lag behind inflation.

Overall, the economic data released ahead of the BoE’s meeting suggests that the central bank will likely give out hawkish forward guidance or remain neutral at the very least. With inflation threatening to rise, there is scope that the central bank’s talks of a rate hike would help to cool higher prices.

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