Inflation and Monetary Measures
At the same time, the inflation outlook remains challenging, influenced by recent fluctuations, rising energy bills, and the government’s fiscal measures. Although inflation has moderated from its peak of 11.1% in October 2022, the past two months have seen renewed upward pressure. In October 2024, inflation climbed to 2.3%, up from 1.7% in September, surpassing the Bank of England’s 2% target. This resurgence, driven in part by higher energy costs, raises critical questions about the central bank’s ability to support growth without risking a new wave of inflationary pressures.
The Bank of England appears cautious, holding interest rates steady amid expectations that further reductions will come more gradually compared to central banks in Europe and the US. Market pricing suggests that no cuts are likely in December 2024, but there is a 77% chance of a 25bps reduction in February 2025 as part of the ongoing monetary easing cycle. In October, Governor Bailey indicated his baseline expectation of four rate cuts in 2025, but the scope for significant easing is constrained. The neutral rate thought to balance inflation and growth-may have risen to between 3% and 4%, limiting the Bank’s flexibility. Additionally, the UK 10-year gilt yield has remained above 4.2% since October, reflecting persistent market caution.
