Prime Highlights: 

The Bank of England is expected to keep interest rates steady at 4.5% this Thursday, following a quarter-point cut in February. 

The UK economy unexpectedly shrank by 0.1% in January, driven by a decline in manufacturing output, a setback for the government ahead of the Spring Statement. 

Key Background: 

The Bank of England (BoE) is widely anticipated to pause its rate cuts this Thursday, maintaining the current rate of 4.5%. This decision comes after a quarter-point rate reduction in February, as policymakers face a challenging economic landscape marked by sluggish growth and persistent inflation. 

Recent data revealed an unexpected contraction of 0.1% in the UK economy during January, driven largely by a decline in manufacturing output. This economic setback is a blow to the government, particularly ahead of its upcoming Spring Statement. Despite this, inflation remains a concern. Although it is gradually moving closer to the BoE’s target of 2%, it remains sticky. In January, inflation rose by 3% year-on-year, up from 2.5% in December, and while monthly inflation fell slightly by 0.1%, the pressures on prices remain. 

Experts predict that while the BoE may hold rates steady this week, further rate cuts could be on the horizon later in the year. Marion Amiot, Chief UK Economist at S&P Global Ratings, suggested that two more rate cuts could occur, though none are expected at this time. She emphasized that despite falling inflation, stronger-than-expected wage growth presents a dilemma for the BoE, as it indicates underlying weakness in the UK’s economic growth potential. 

Additionally, the BoE will be closely monitoring potential trade decisions by the US administration, as trade policy uncertainties continue to impact investor and consumer confidence, further weighing on UK economic performance. As the Bank of England navigates these complexities, it faces a delicate balancing act to support growth while controlling inflation.