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Three pivotal factors shaping the Bank of England's upcoming interest rate decision

As the Bank of England gears up for its Thursday meeting to deliberate on interest rates, it faces a plethora of issues to dissect. With the current rate standing at a post-crisis peak of 5.25% and inflation stubbornly hovering at 6.8%, the Monetary Policy Committee (MPC) has its work cut out.

The Wage Growth Conundrum

The MPC has consistently emphasised the labour market's role in shaping inflation's future trajectory. However, the Bank finds itself in a quandary. Unemployment has surged unexpectedly to 4.3%, according to the latest labour market figures.

Meanwhile, annual salary increases have plateaued at a record 7.8%. This elevated wage growth suggests that inflation is becoming more entrenched, as workers demand higher salaries, compelling companies to escalate prices further.

The Economic Slowdown

The British economy contracted more than anticipated in July, fuelling speculation that a recession might be on the horizon. Interest rate hikes are intended to decelerate economic activity by elevating borrowing costs.

However, the full ramifications of previous decisions by the Bank are yet to manifest fully. Andrew Bailey, the Bank's governor, recently acknowledged that more tightening is in the offing.

Inflationary Pressures

It's no secret that the current inflation rate surpasses the Bank's 2% target. Adding to the woes, the escalating cost of petrol and diesel is likely to cause a minor uptick in inflation for August.

The Bank will be particularly vigilant about services inflation, which has recently risen from 7.2% in June to 7.4% in July, marking its highest level since March 1992.


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