Britain's central bank looks set to keep interest rates at their highest in nearly 16 years on Thursday, but the prospect that inflation may soon be back at the Bank of England's 2% target will leave investors looking for hints of rate cuts to come.
Sharp falls in energy prices since the BoE published its last forecasts on Nov. 2 mean many economists now expect inflation - which was 4% in December - to be on target as soon as April, far earlier than the BoE's forecast of late 2025.
The risk of a slow "last mile" for inflation - which peaked at a 41-year high of 11.1% in October 2022 - prompted the BoE to warn last year that rates would need to stay high for an "extended period", and might even need to rise further.
Three of the BoE's nine policymakers voted in December for a further rise in rates to 5.5% from 5.25%, as a stagnant economy had failed to cool rapid wage growth, a key driver of medium-term inflation trends.
But this month economists polled by Reuters expect only one policymaker to vote for a rate rise - and a minority think another policymaker might vote to cut rates for the first time since March 2020.
"The tone on inflation is likely to indicate a mini victory lap with the Bank of England satisfied with the path to lower inflation. However, it may be too soon to declare victory," said Mohit Kumar, chief European economist at U.S. investment bank Jefferies, who expects one official will vote for a rate cut.
Governor Andrew Bailey will hold a press conference at 1230 GMT after the 1200 GMT rate decision, and has various options to signal a looser policy stance.
European Central Bank officials openly discussed the prospect of rate cuts last month - something the BoE has yet to do.
WEAK GROWTH
British growth has been very sluggish in recent months, with the latest official data showing the economy risks slipping into a mild, technical recession.
This offers a tough backdrop for Prime Minister Rishi Sunak, who must hold a national election within the next year. The possibility of further tax cuts at finance minister Jeremy Hunt's March 6 budget may be one factor which will make the BoE cautious about signalling future policy loosening.
But a bigger concern is likely to be the fear among some policymakers that wage inflation may not fall back to the rate of around 3% which economists think is needed to keep inflation close to 2% over the medium term.
Annual wage growth, excluding bonuses, was 6.6% in the three months to the end of November, and many large employers expect to give annual pay settlements in the region of 5% this year.
Higher freight costs caused by attacks on shipping in the Red Sea could also make it harder to cut rates, if conflict in the Middle East persists.
Karen Ward, chief market strategist for Europe, the Middle East and Africa at J.P. Morgan Asset Management, said the BoE may take the view that any fall in inflation below 2% risked being temporary and insufficient to justify a rate cut.
"It might be helpful for the Bank to ... state at an early stage that - just as it erred away from placing too much weight on transitory high inflation - it will also place less weight on transitory low inflation," she said.
