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Bank of England expected to hold interest rates

Markets put almost zero chance of a rate cut

Bank of England building in London.
Bank of England not yet ready to cut UK interest rates, experts say. (Reuters / Reuters)

The Bank of England makes its next interest rate decision on Thursday but no one is expecting a cut from the current 5.25%.

Markets put almost zero chance of a rate cut, which would only bring more pain to millions of mortgage holders, house hunters and borrowers. The monetary policy committee (MPC) is expected to keep the key rate unchanged at a 16-year high of 5.25%, where it’s been since August, but investors are keen to see if any other member will vote for a rate cut.

At the last meeting in March, just one member of the MPC, Swati Dhingra, voted for rates to be cut by 0.25 percentage points, but the remaining eight members voted for no change. Importantly, no one voted for a hike.

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Investec's chief economist Philip Shaw said, "This broad direction illustrates that collectively the committee is moving gradually towards a rate cut."

Shaw also said the possibility of another MPC member joining the "easing camp" and voting for a rate decrease on Thursday.

BoE deputy governor Dave Ramsden last month raised the prospect of a lower inflation forecast when the central bank sets out its latest projections.

Read more: UK house prices rise despite high mortgage rates

"Over the last few months I have become more confident in the evidence that risks to persistence in domestic inflation pressures are receding, helped by improved inflation dynamics."

Some saw this as a hint that he might be moving towards voting for a rate cut.

High inflation is the reason rates have been high but the UK rate of inflation came in at 3.2% in March, the lowest since September 2021, according to figures from the Office for National Statistics (ONS).

Still, investors might see the exact same 8-1 vote from the previous meeting.

Steve Matthews, investment director at Canada Life Asset Management, doesn't see any movement from the majority eight this time - suggesting a cut isn't imminent.

"Looking ahead to Thursday... we expect an 8-1 vote in favour of no cut, with Swati Dhingra being the lone outlier.

"While there's optimism within the monetary policy committee that inflation will close in on the all-important 2% as the fuel effect falls out, the Bank of England will be deeply aware of the second-round inflation effect.

"Rather than patting itself on the back when the 2% figure is hit, it will require clear evidence that inflation is under control rather than simply hitting a target."

City traders have pared back their bets on the timing of the BoE’s first cut. There is some speculation that it could come in June, but consensus forecasts are for September.

HSBC analysts said: “If the Bank wants to even leave the door open for a June cut, we think it will need to push back against the market in its May communications”.

“Part of this could be in the language – perhaps emphasising that it can cut rates while keeping them restrictive. And part of it may be in the forecast profile: we suspect the MPC will revise down its inflation forecasts such that they are below target over the medium term.”

Nomura Bank sees a first 25 basis points cut in August, “followed by quarterly cuts. Markets are only fully priced for September and expect fewer cuts in total (130bp) than we do (175bp).

Susannah Streeter, head of money and markets at Hargreaves Lansdown, said "hopes are creeping back in about a summer interest rate cut, although September is still very much a possibility".

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The OECD said it did not expect the BoE to start reducing rates before the third quarter, as it warned of “sticky” services price growth.

Deutsche Bank also doesn’t see the BoE cutting rates until June or May.

“We don't expect a change in Bank Rate – despite some encouraging news on inflation and the labour market. We think the MPC will instead set the stage for a June rate cut with the May decision highlighting a more split MPC (with multiple votes for a rate cut), a dovish inflation outlook (with CPI falling faster to target and tracking well below it in three years' time), and minor tweaks to the forward guidance (signalling that some adjustment in Bank Rate may be warranted to maintain an appropriate degree of restrictiveness in monetary policy),” Deutsche Bank’s chief UK economist Sanjay Raja, said.

Experts also warn that two key economic indicators for the Bank of England – pay growth and services sector inflation – have remained more stubborn than inflation.

Andrew Goodwin, chief UK economist for Oxford Economics, said: “The data published in mid-April for services inflation and private sector regular pay growth has likely extinguished any remaining hopes of a move in May.

“Though both measures have continued to fall, progress has been slightly slower than the MPC anticipated, and they are currently running marginally higher than the forecasts published in February’s Monetary Policy Report.”

He said it is likely to be a “close call” on whether the MPC decides to cut rates in June or August.

The Bank of England will shed more light on its predictions for the economy and the path of interest rates when it publishes the latest Monetary Policy Report alongside the rates decision on Thursday.

Capital Economics thinks the BoE will bring rates down to 4% by the end of the year, while markets are leaning towards 4.5%.

The European Central Bank is widely expected to cut rates in June, while the Federal Reserve is not expected to make its first move until after the summer.

Traders expect the Bank of England to cut borrowing costs earlier and faster than the US Federal Reserve.

Anxiety has set in among UK mortgage lenders, with rates being hiked left, right and centre, amid uncertainty about how the Bank of England's interest rate path will play out.

“Developed economies’ central bankers need to ask themselves whether they want their policy stance to become ever more repressive toward economic growth. If the answer is ‘no’, then real interest rates should be stabilised (and a case may be made for them being reduced) – hence reacting to inflation,” Paul Donovan, chief economist at UBS Global Wealth Management, said.

Buyers have also become cautious amid rising mortgage rates, which has led a slump in house prices last month.

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Nicholas Mendes, mortgage technical manager at broker John Charcol said: 'The market is in dire need of some positive movement from the Bank of England, until we see a rate reduction we're going to see a period of rate increases as markets start to be unsettled.

'Mortgage holders coming to the end of their fixed deals this year and in early 2025 will need to be prepared to see rates higher than in earlier predictions.

'Initial forecasts of a 3.5% fixed rate by August to late September are very unlikely, with any sign of such a deal now pushed back to later in the year.'

Most major lenders have entered another cycle of increasing their mortgage rates over the past two weeks.

The Bank of England will announce its latest base rate decision on Thursday at noon.

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