This week, the cost of borrowing is anticipated to hit its lowest point in over 18 months. Senior economists at the Bank of England are set to deliberate on the possibility of a cut in the UK’s base interest rate, which is currently at 4.75%. The majority of specialists are forecasting that they will cut it by a quarter point to 4.5% during their Thursday, February 6 announcement. This potential reduction continues the trend of cuts which began last summer. The base rate is influential in determining the cost of mortgages and loans as well as affecting the interest rates that banks provide on savings accounts.

In recent years, rate increases aimed at curbing soaring inflation have pushed mortgage rates significantly above what was typical for most of the past decade. Although reaching as high as 5.25% in late 2023, the Bank's policymakers lowered the base rate to 4.75% across several months last year. When inflation is high, higher interest rates are usually imposed to dissuade spending, thereby reducing the pace of price increases. Currently, UK inflation stands at 2.5%, a figure considerably less than recent peak levels, and with the country's economic growth languishing, another rate decrease is predicted. Such a cut could bolster spending and energise the economy.

Thomas Pugh, an economist at RSM consulting firm, claims that it's a "sure bet" the Bank will reduce rates down to 4.5%. He highlighted several indicators that suggest inflation might be gearing for an upward swing, presenting a "dreaded trade-off" for policymakers. According to the latest analysis, "The economy has clearly underperformed since the last set of forecasts by the Bank back in November," but there's an alarming trend of "now rising again" inflationary pressures.

The main rate of inflation is projected to climb towards 3% over the upcoming spring months. Contributing factors include escalating energy costs and the impact of policies announced during the October Budget. Chancellor Rachel Reeves raised national insurance contributions (NICs) for companies in October, a move aimed at bolstering government funds for public services like the NHS but also expected to hike costs and fuel inflation. As the Bank’s Monetary Policy Committee, comprising nine top economists, deliberates on their decision, they face the challenge of juggling these conflicting elements.

When economic growth lags while inflation mounts, experts call it "stagflation". Matt Swannell, chief economic advisor to the EY Item Club, a forecasting body, said that a quarter-point cut in rates appears "highly likely" at the Bank’s February meeting. Despite this, Swannell said: "But that does not take away from the longer term dilemma facing the Bank of England, as its latest set of projections are likely to show that upcoming growth will be weaker, but near-term inflation will be higher than when it met three months ago.".