Resurging UK Inflation Will Keep BOE Cautious on Cutting Rates

The recent resurgence in UK inflation, as indicated by the Consumer Prices Index including owner occupiers' housing costs (CPIH) rising to 3.5% in December 2024, has a significant impact on the Bank of England's (BOE) decision-making process regarding interest rate cuts. The BOE's primary mandate is to maintain price stability, with an inflation target of 2%. The resurgence in inflation, which is above the target, suggests that the BOE may need to consider raising interest rates to control inflation, rather than cutting them to stimulate economic growth.

In the context of the BOE's Monetary Policy Committee (MPC) meeting in January 2025, the minutes of the meeting stated that "the MPC judged that a further increase in Bank Rate was necessary to return inflation to the 2% target in a sustainable manner." This decision was made despite the economic slowdown and the government's focus on growth, indicating that the BOE prioritizes controlling inflation over stimulating economic growth.

The BOE's decision to raise interest rates in January 2025, rather than cut them, is a direct response to the resurgence in inflation. The BOE's Governor, Andrew Bailey, stated that "the MPC's decision to raise Bank Rate was driven by the need to bring inflation back to the target in a sustainable manner, given the recent resurgence in inflation and the risks to the inflation outlook." This statement highlights the BOE's commitment to controlling inflation, even in the face of economic slowdown and government pressure for growth.

The primary factors driving the increase in UK inflation are global supply chain disruptions, energy price increases, food price inflation, and the impact of the war in Ukraine. These factors have contributed to a sharp rise in UK inflation, with the annual rate reaching a 41-year high of 11.1% in October 2022. However, there are signs that inflation may ease in the coming months, such as the energy price cap, the potential resolution of the conflict in Ukraine, and the BOE's interest rate increases.

In conclusion, the recent resurgence in UK inflation has a significant impact on the BOE's decision-making process regarding interest rate cuts. The BOE prioritizes controlling inflation over stimulating economic growth, as evidenced by its decision to raise interest rates in January 2025, despite the economic slowdown and government pressure for growth. The BOE's commitment to maintaining price stability, as indicated by its inflation target of 2%, is a key factor in its decision-making process.