UK interest rates are expected to remain at their highest level in 16 years

Interest rates are expected to be fixed at 5.25% for the sixth time in a row by the Bank of England on Thursday.

The decision comes at a time when inflation, which measures price increases over time, remains above the bank’s 2% target at 3.2%.

In addition to the interest rate decision, the bank will also release its latest forecasts estimating what will happen to inflation and the UK economy.

The report comes amid pledges from both major political parties on how to drive economic growth.

The health of the UK economy has been in the spotlight, with a general election set to be called in the coming months, and economic policy is likely to be a key battleground in the quest for votes.

While economists expected interest rates to remain at their highest level in 16 years on Thursday, most expect the bank to cut rates for the first time in the summer.

The bank raised interest rates, then kept them at a high level, in an attempt to slow the pace of rising consumer prices and reduce the cost of living.

The theory behind increasing interest rates to address inflation is that by making borrowing more expensive, more people will cut back on spending and this leads to lower demand for goods and dampens rising prices.

But it is a balancing act because high interest rates can hurt the economy as companies refrain from investing in production and jobs.

Prices began to rise rapidly as demand for goods increased after restrictions related to the Corona virus were lifted. Then energy and food prices rose in the wake of the Russian invasion of Ukraine, causing inflation to peak at 11.1% in October 2022 – the highest rate in forty years.

The bank base rate sets the rates set by major banks and lenders. The higher level meant people paid more to borrow money for things like mortgages, but savers also got better returns.

Emma Wall, head of investment research and analysis at Hargreaves Lansdowne, said anything other than the interest rates held by the bank would be a “complete surprise”.

She said markets were not expecting the cut, and that Bank of England Governor Andrew Bailey had not provided “advance guidance” on the change.

But she added that interest rate cuts were “on the horizon” and that the Riksbank’s move to cut interest rates on Wednesday “indicates the mood”.

“Interest rates in the UK and Europe will be cut over the next two months,” she said.

“As inflation falls, we expect interest rates to fall,” said Fiona Eastwood, chief operating officer of Merlin Entertainments, which owns Madame Tussauds.

Ms Eastwood, who is also a board member of industry group UKHospitality, added: “Many of our UK hospitality and leisure businesses are still struggling with Covid-related debt, and high interest rates are diverting money away from investing in the business, but “Most importantly, it is about consumer confidence.”

A quarter of hospitality businesses have no cash reserves, and just under a third have less than three months, so interest rates are “critical” for their survival, she said.

Laith Khalaf, head of investment analysis at AJ Bell, said: “It is almost certainly too early for the Bank of England to pull the trigger on a rate cut at the moment,” especially against the backdrop of the US central bank and the Federal Reserve. Warning that interest rates may remain high.

Khalaf said markets had indicated it was just a “toss of a coin” on whether interest rates would be cut in June, but added that investors were more inclined towards a rate cut in August.

He said that although it is “easy to get carried away into obsession” about when the first rate cut will occur after a long period of rising interest rates, “it is important to zoom out a little and take a longer view as well.”

“Although the next move for interest rates will almost certainly be lower, there will not be a sudden collapse in interest rates after that,” he said.

“Policy will be adjusted slowly and the endpoint will not be near-zero interest rates as they were in the 2000s.”

The Bank of England had previously said it expected inflation to fall slightly below its 2% target by the summer.

Bailey has sounded more optimistic about interest rate cuts, suggesting that the 2% target does not need to be achieved before cutting rates – only that bank policymakers must be “convinced” that he will do so.

The UK fell into recession at the end of last year when the economy contracted for two successive three-month periods, but policymakers believe the contraction may already be over.

The latest official figures on the economy will be published on Friday, which will confirm whether or not the UK economy has grown in the first three months of 2024.