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Bank of England holds interest rates but hints at summer cut

interest rates The Bank of England building is seen surrounded by flowers in London, Britain, May 8, 2024. REUTERS/Carlos Jasso/File Photo
The Bank of England has kept interest rates at 5.25%. (Reuters / Reuters)

Bank of England (BoE) policymakers have kept interest rates on hold at 5.25% for a sixth consecutive time, but it signalled that it could cut rates if inflation keeps going down.

Bank governor, Andrew Bailey, said he was “optimistic” that inflation will keep falling in the coming months as he signalled policymakers were closer to reducing the cost of borrowing.

Read more: Interest rate hold edges stocks higher

Bailey said things are moving in the right direction but he fell short of giving an exact date for a rate cut. "We’ve had encouraging news on inflation and we think it will fall close to our 2% target in the next couple of months," he said. "We need to see more evidence that inflation will stay low before we can cut interest rates. I’m optimistic that things are moving in the right direction."

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Bailey said a reduction in interest rates in June was “neither ruled out nor a fait accompli," adding that the Bank has “no preconceptions” about how fast or how far it might cut interest rates.

The decision to keep rates on hold was not unanimous, however. The nine members of the Monetary Policy Committee (MPC) were split, with seven voting to hold rates and two voting to cut to 5%.

Andrew Bailey, Sarah Breeden, Ben Broadbent, Megan Greene, Jonathan Haskel, Catherine L Mann and Huw Pill voted in favour of the proposition. Two members — Swati Dhingra and Dave Ramsden — voted against the proposition, preferring to reduce Bank Rate by 0.25 percentage points, to 5%.

Threadneedle Street has raised, and then kept interest rates at a high level, in an attempt to slow the pace of inflation but this has added pressure to homeowners as mortgage rates have surged.

Sticky 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).

Inflation is expected to fall more than previously thought over the coming years, the BoE has projected, dropping below its 2% target to 1.5% in 2026.

The BoE could even cut interest rates faster than investors expect, according to the governor. "With the progress we have made, to make sure that inflation stays around the 2% target and is neither too high nor too low, it is likely that we will need to cut the bank rate over the coming quarters and make monetary policy somewhat less restrictive over the forecast period. Possibly more so than currently priced into market rate," Bailey said.

Read more: Best UK mortgage deals of the week

The BoE also updated its forecast and now believes that the UK economy returned to growth in the first quarter of this year, after shrinking in the third and fourth quarters of 2023.

"Following modest weakness last year, UK GDP is expected to have risen by 0.4% in 2024 Q1 and to grow by 0.2% in Q2. Despite picking up during the forecast period, demand growth is expected to remain weaker than potential supply growth throughout most of that period," it said.

"A margin of economic slack is projected to emerge during 2024 and 2025 and to remain thereafter, in part reflecting the continued restrictive stance of monetary policy."

The BoE’s base interest rate dictates the rates set by high-street banks and lenders. Most major lenders have entered another cycle of increasing their mortgage rates over the past two weeks.

Chancellor Jeremy Hunt urged the Bank of England’s not to rush into cutting rates.

“What we want is sustainably low interest rates. I would much rather that they waited until they’re absolutely sure inflation is on a downward trajectory than rushed into a decision that they had to reverse at a later stage," he told reporters.

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.”

Read more: Pound falls against dollar after Bank of England interest rate news

Rob Wood, chief UK economist at Pantheon Macroeconomics, said the BoE had “moved another half step towards a rate cut.”

He said: “The MPC’s new forecasts - which have inflation below target at the two-year horizon if interest rates follow the path expected by markets ahead of the decision - suggest the MPC needs to start cutting by August."

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)."

Nicholas Hyett, investment manager at Wealth Club, said: "The market expects Friday’s GDP data to show the UK returned to growth in the first quarter, ending last year’s short-lived recession. But a 12% cut in the energy price cap will probably drag inflation back below the bank’s 2% target this month – at least temporarily. The former suggests interest rates are just fine where they are, the second that rates could do with a trim.

"The result is a natural inclination to sit on the fence a little longer, especially since cutting too early risks sinking sterling and kick-starting another bout of inflation. Leave interest rate cuts too late though and the Bank risks accidently cratering the economy in its eagerness to get inflation under control. The MPC’s two dissenters clearly think that risk is growing.”

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

Lindsay James, investment strategist at Quilter Investors, said: “High interest rates are helping to bring down inflation, but more evidence is needed that this is a sustainable shift before rates can be cut. That is at least the message emanating from the BoE following its decision to keep interest rates at 5.25% for the sixth time this hiking cycle, but it may soon begin a process of gradual rate cuts.

"It has been a long and painful period for businesses and consumers, but it appears inflation is now close to being under control and less likely to spike, given energy prices are well off their highs and storage levels remain robust after a mild winter.

"Focus can thus turn to supporting economic growth at a time when the UK economy is struggling to escape the orbit of a growth rate that is effectively zero."

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.

The governor said it was “not a law” that the US Federal Reserve would change its interest rates first and that other central banks would follow.

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