Bank of England paves way for rate cuts to begin next month
Governor Andrew Bailey ‘optimistic things are moving in right direction’
The Bank of England (BoE) has paved the way for the start of interest-rate cuts as soon as next month, and governor Andrew Bailey said there could be more reductions than investors expect.
The BoE’s monetary policy committee (MPC) kept rates at a 16-year high of 5.25pc yesterday but deputy governor Dave Ramsden joined external MPC member Swati Dhingra in backing a cut to 5pc, the central bank said.
Economists polled by Reuters had mostly expected an 8-1 split to keep rates on hold. British government bond yields fell and sterling briefly dipped against the dollar.
After cutting rates in March 2020 as Covid swept the world, the BoE began raising borrowing costs in December 2021 – earlier than other leading central banks – to counter high inflation which peaked at 11.1pc in October 2022.
Headline inflation has since fallen back and the BoE expects it slowed to around its 2pc target in April, largely because of falling energy prices.
The central bank remains on guard because of still-strong growth in wages and services prices which it expects to temporarily push inflation above 2pc later this year. But Mr Bailey sounded hopeful that higher borrowing costs were doing their job.
“We need to see more evidence that inflation will stay low before we can cut interest rates,” he said. “I’m optimistic that things are moving in the right direction.”
Mr Bailey added the BoE might need to cut rates by more than the market expected and it could start at its next scheduled MPC announcement on June 20.
“Let me be clear, a change in bank rate in June is neither ruled out nor a fait accompli,” Mr Bailey said.
Investors have been trying to work out whether the BoE is likely to cut rates in June – when the European Central Bank has already signalled it will move – or, like the US Federal Reserve, will hold out longer.
On Wednesday, Sweden’s central bank cut its key interest rate for the first time in eight years.
A cut by the BoE could offer a lifeline to UK prime minister Rishi Sunak, who has told voters the economy is turning a corner but is struggling to reduce the opposition Labour Party’s big opinion poll lead before an election later this year.
UK chancellor Jeremy Hunt sought to dispel any sense that the government wanted to pressure the BoE.
“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 said.
In an attempt to spell out its likely next steps, the BoE said it would consider how the upcoming economic data “inform the assessment that the risks for inflation persistence are receding.”
Two official sets of labour market and two rounds of inflation figures are due before June 20.
“We think some soft inflation and wages data may be enough to prompt it to cut rates at the next meeting in June, if not at the following meeting in August,” Paul Dales, chief UK economist at consultancy Capital Economics, said.