(CTN News) – Almost 15 years ago, when the UK was amid a prolonged period of near-zero interest rates, a Bank of England’s senior executives advised me that savers might cope with poor returns by depleting their financial nest eggs.
At the time, the Bank was bombarded with letters from angry savers who could no longer exist off the interest returns on their savings accounts.
Now, I hear that the contrary is true. The Bank’s post office is flooded with messages from depositors ecstatic about their big returns following the sudden rise in interest rates to above 5%.
Analyzing the delicate balance the Bank of England must strike amidst public expectations, political pressures, and financial market uncertainties.
None of this should impact where interest rates are currently headed. However, the Bank of England‘s decision-makers understand they must navigate difficult waters with the public, politicians, and financial markets in the coming year.
The main question for the Bank in 2024 is when it will start cutting rates. The first judgement is scheduled for Thursday, and few expect adjustments to the existing rate of 5.25%.
The crux of the matter is that the headline rate of inflation – the rate at which prices grow – may decrease sharply, possibly below the 2% target by spring, in tandem with actual falls in domestic energy prices. However, interest rates are not projected to fall so quickly.
The Bank will monitor other underlying inflation metrics, such as core inflation, which excludes the influence of food and energy prices.
It remains to be seen if earnings and prices have shaken off the period of above-average growth. Some economists believe the Bank will wait until it has more firm data, like if annual wage bargains will continue far above 2% by its May announcement.
Fighting rate cuts will be difficult to justify if inflation is well below 2% and the economy is stagnant or even in a technical recession.
There will be industry pressure for cuts, and in an election year, there may be political pressure, if not directly from the government.
On Thursday, the Bank will have a greater opportunity to explain its views than usual. It will release its quarterly assessment of the UK economy and inflation estimates.
It also conducts an annual review of the health of the economy’s supply side, including workforce size, the impact of supply chain difficulties, and post-Brexit policy changes.
Ben Bernanke, the former head of the US central bank, is also reviewing the bank’s record. Furthermore, MPs are questioning the Bank’s decision to reverse quantitative easing, a stimulus policy used in 2009 to help the economy recover from the 2007-08 financial crisis.
The Bank will also have to assess resilience indicators in the UK economy, such as the property market. The Bank can now anonymously trace every mortgage in the United Kingdom. Its grasp of how interest rate fluctuations affect consumer demand is significantly more advanced than in analogous historical instances, such as in 1992.
The voting habits of the committee’s nine members that determine interest rates will be quite fascinating. In a volatile election year, where the sitting administration would prefer a series of rate cuts to signal a “turning point,” it also faces one of the most serious tests of its independence.
So there will be no rate decrease this Thursday, but the Bank may shift away from previous rhetoric indicating that rates could still rise.