Interest rates are set to be kept on hold after the first hike in a decade last month, but the outlook for inflation will be in sharp focus after surging to a near-six year high.
The Bank of England’s nine-strong Monetary Policy Committee (MPC) is expected to vote unanimously to leave rates unchanged after November’s milestone rise from 0.25% to 0.5%.
But minutes of the MPC meeting alongside the noon decision will be poured over for clues on whether the Bank believes inflation has now peaked or will rise further after hitting 3.1% in November.
Governor Mark Carney and the Bank’s policymakers will give their latest verdict on rates (PA)
Official data on Tuesday revealed the higher-than-expected inflation figures, which means Bank governor Mark Carney must pen a letter to Chancellor Philip Hammond – due to be published in February – outlining the reason behind the rapid rise.
There is hope that inflation will begin to ease back after November as the impact of the pound’s plunge since the Brexit vote begins to pass, which would come as welcome respite from this year’s squeeze on household finances.
Employment figures on Wednesday highlighted the ongoing pressure on family finances as wage growth fell behind inflation for a seventh month in a row, at 2.3%.
If inflation has further to rise, this could put pressure on the Bank’s plan for very gradual and moderate rate rises over the next three years and leave doubt over speculation last month’s hike was a “one and done” move.
Economist Allan Monks at JP Morgan said: “Inflation appears set to run above the BoE’s forecast following, which is likely to prompt the BoE to upgrade its near term forecast in February.
“This backdrop may further test the MPC’s tolerance of above target inflation, but we see this as an issue the BoE will respond to next year rather than at this week’s meeting.”
The Bank of England voted 7-2 to increase rates in November as it sought to cool surging inflation.
It was widely expected after repeated hints from Mr Carney and other key rate-setters, while the Bank also said two more rate hikes were likely over the next three years to return inflation back to its 2% target, which could see rates hit 1% by the end of 2020.
But many experts said they believed rates will remain at 0.5% for at least another year.
The latest meeting comes amid mixed reports from the economy, with activity in Britain’s manufacturing sector jumping to its highest level in more than four years while service sector growth has eased back.
This may come as a welcome rebalancing of the economy, but shows a worrying fall-out from Brexit-fuelled inflation on the UK’s biggest contributor to gross domestic product.
Services firms increased prices last month at the fastest pace for nearly a decade in the face of soaring costs, which suggests that inflation may well rise above the current 3%.
This hit new order growth as consumer spending suffered a “double whammy” effect of rising prices and weak wage growth.
There was also gloom over the economy on Budget Day after Britain’s fiscal watchdog, the Office for Budget Responsibility, slashed growth predictions for the next five years.
It also pencilled in lower government borrowing this year and next, but hiked its long-term forecasts.
Howard Archer chief economic adviser at the EY ITEM Club, is forecasting growth to remain at 0.4% in the fourth quarter – unchanged from the third quarter – but added that “much will depend on how well the services sector performs and how much consumers spend over the crucial Christmas period”.