Investors warn that the Bank of England is lagging behind its peers in combating inflation.

Investors have warned that the Bank of England is facing a stubborn inflation problem which may prevent it from reducing interest rates as dramatically as its peers next year. The central bank is preparing for its final policy session of 2023.

The Monetary Policy Committee will likely announce on Thursday that its critical rate is still at 5.25 percent, a level not seen in 15 years. It also reiterated pledges to keep a “persistently tough” stance towards the cost of borrowing.

At its two most recent meetings, in November and September, the MPC decided to keep interest rates at this level after they were raised from historic lows at the end of 2020.

The meeting this week comes amid global speculation that rate-lifting cycles by central banks, which began after the end Covid-19 locksdowns, are not only over but could even be reversed by 2024 due to a fall in headline inflation indicators in advanced economies.

The BoE is facing a more difficult task than other central banks, such as the European Central Bank, in bringing consumer price inflation back to its target of 2 percent. It currently stands at 4.6%.

Ruth Gregory, deputy UK chief economist at Capital Economics said that the evidence for rate cuts is not there in the short term. The MPC is wary of making the pound fall, and market expectations of interest rates shift in favor of an earlier cut.

Investors don’t expect the BoE to cut its benchmark rate before June 2024. This is later than the ECB or the US Federal Reserve who are expected to lower their main rates between March and may. By the end Friday, the markets had priced in 130 basis points for the ECB, and 100 for the Fed, by the end next year. But only 79 were expected from the BoE.

The MPC received some positive data since its last meeting. Consumer price inflation has dropped sharply, from 6.7% in September to just 2.9% today. The MPC has also seen a slight improvement in wage figures, but policymakers are being careful not to jump to conclusions.

Andrew Bailey, BoE Governor, warned the markets in November they underestimated how persistent inflation will prove to be. Huw Pill is the chief economist at . He told that it was dangerous to place too much emphasis on a single low inflation reading. Important indicators like services inflation and wage growth were still “at very high levels”.

Several indicators indicate that the UK has a harder time containing price growth than the eurozone. In November, headline inflation in the Eurozone fell to 2.4%, which is close to ECB target of 2%. Many member countries reported price growth below target or deflation.

Analysts expect the UK inflation rate to remain above the target and only slowly ease.

Consensus Economics – a company which polls the leading forecasters – surveyed economists in December and found that they expect UK inflation will still be at 3.6 percent by March. This is higher than the US’s 2.9 percent or the Eurozone’s 2.4 percent. This is more optimistic than BoE’s forecast which shows price growth above 3 percent by 2024.

Official figures reveal that other measures of UK inflation are much higher. According to the Office for National Statistics, core inflation, which excludes volatile energy and food costs, is higher in the UK than any other G7 nation, including the eurozone.

In October, the UK’s services inflation rate, which is considered to be a more accurate measure of price pressure in the country, was 6.6%. This is higher than the 4.6% in the eurozone for the same month – it dropped to 4% in November – and above the 5.1% in the US.

The BoE closely monitors wage growth in the UK as a measure of pricing pressures. It is also higher than in other countries.

The international tracker of the jobs website Indeed shows that the posted pay growth in October was down to 7 percent year-on-year, from 7.4 percent in June. However, it is still higher than the US or the Eurozone.

Official figures show that the UK has a pay growth of close to 8%, which is nearly twice as high as the US or eurozone.

The MPC will gain more insight into the current state of the labor market by obtaining the latest official data on jobs and wages on Tuesday, before voting.

Pill said that while the BoE cut its growth expectations, it still predicted output would stagnate in 2019. The downgrades are not a boon to the fight against inflation.

It is possible that the sluggishness of activity in the economy may not be related to a reduction in inflationary pressures. This is because officials are less optimistic about the demand side of the economic system.

Officials in the UK, who are likely to enter an election year, expect to be under increased pressure to reduce interest rates, if the UK economy continues to deteriorate.

The UK’s inflation expectations have been improving, according to economists. In the BoE’s public attitudes published on Friday, Britons thought that the average rate of price increases over the next year would be 3.3%. This is a drop from 3.6 percent in August when the question was asked, and the lowest rate in the past two years.

Investors will pay attention to the voting pattern at the MPC on Thursday. The MPC has had a divided vote in recent meetings. Three members of MPC — Megan Greene Jonathan Haskel Catherine Mann — voted last month to increase borrowing costs, while the rest opted to keep it the same.

Markets would interpret any defections by that hawkish group as a sign that rate cuts are more likely to occur next year.

Sanjay Raja is an economist with Deutsche Bank. He predicted that the BoE will start reducing rates in the second quarter next year. However, he warned “wage stickyness and the upcoming changes to CPI may delay the start of a easing cycle”.