The Bank of England will deliver one of the most closely watched interest rate decisions since the financial crisis later on Thursday.
Economists and investors are expecting the first increase in a decade.
In September, the Monetary Policy Committee (MPC) laid the groundwork for an increase “over the coming months” if economic growth remained stable.
If the Bank raises rates from the current 0.25%, it would represent the first increase since July 2007.
Commercial banks use the Bank of England’s base rate as a reference point for their accounts and loans.
Higher rates are expected to hit the 3.7 million households with a standard variable rate (SVR) or tracker mortgage. They will also benefit a large share of the 45 million savers who will enjoy higher returns from accounts that pay variable interest rates.
Charities and business groups have warned the Bank against raising rates, which they claim will put a strain on homeowners and companies struggling to make ends meet.
This is also above the Bank’s estimate of 2.8%. Policymakers believe inflation will peak just above 3% in the coming months.
Pay growth low
The UK’s jobs-rich recovery continues, with unemployment falling to a four-decade low of 4.3% in recent months.
This is lower than the 4.4% rate forecast by the Bank in August, and the Bank’s estimate of the so-called natural rate of unemployment, where further falls are meant to start pushing up pay packets as employers are forced to pay higher salaries to recruit and retain staff.
But pay growth has remained weak.
Average total weekly earnings grew by 2.2% in the three months to August compared with the same period a year earlier, while the Bank’s Agents noted in September that pay deals had “clustered around 2% to 3%”.
In the decade before the financial crisis, earnings growth averaged 4.25%.
There are tentative signs that pay could be picking up, particularly for the 82% of workers in the private sector.
Jan Vlieghe, an external member of the MPC, noted that annualised private sector pay growth over the past five months had averaged just over 3%.
George Buckley, chief UK economist at Nomura, notes that after October’s jobs report, this reading stands at 3.7%.
With three-month and six-month annualised rates running at 2.6% and 3.5% respectively, he believes the trend “looks to be moving towards a strengthening of earnings growth, which would not be a surprise given the tightening that we have seen in the labour market”.
Minutes of the Bank of England’s September meeting also highlight that temporary factors have depressed the annual growth rate of weekly earnings by about 0.7 percentage points, which will unwind over the coming months.
Whatever the Bank of England decides on Thursday, one thing is clear. Any rate rises will be “limited and gradual”.
Uncertainties remain on the horizon.
The Bank’s current forecasts are predicated on a smooth Brexit, and it is likely to stress that future changes to monetary policy are not on a pre-determined course and will be data dependent.