Band of England sits tight on interest rates but won’t rule out cut next month
The Bank of England will not rule out cutting UK interest rates next month, after deciding to hold borrowing costs at the same level for another month.
The Bank’s Monetary Policy Committee (MPC) said it was not yet at a point when it can start cutting rates and instead held them steady at 5.25 per cent.
But Governor Andrew Bailey said he was “optimistic that things are moving in the right direction”, with inflation set to fall to its 2 per cent target between April and June. He added: “Before our next meeting in June, we will have two full sets of data – for inflation, activity and the labour market – that will help us in making that judgment afresh. But, let me be clear, a change in bank rate in June is neither ruled out nor a fait accompli.”
It means there is no certainty of a rate cut but the committee could be swayed by upcoming datasets if they provide enough evidence that inflation has reached the target level, and it is going to stay there.
Chancellor Jeremy Hunt, inset, said he would “much rather” policymakers “wait until they are absolutely sure inflation is on a downward trajectory than rush into a decision that they had to reverse at a later stage”. But he added that it was encouraging to see “real optimism” from Mr Bailey for the first time.
Mr Bailey also indicated that the financial markets are more pessimistic about when interest rates will be reduced than the Bank of England.
“With the progress we’ve made, to make sure inflation stays around the target, it is likely that we’ll need to cut bank rates in the coming quarters, possibly more so than is currently priced into markets,” he said. But he stressed that the committee has “no preconceptions” about how far and how fast it can lower interest rates, and it will make a judgment based on the economic data it sees before each meeting.
In a stronger signal that the tide is turning among the ratesetters, two members of the Bank’s nine-person MPC voted for interest rates to be cut by 0.25 percentage points, to 5 per cent.
The MPC members, Swati Dhingra and Dave Ramsden, felt Consumer Prices Index (CPI) inflation is already on a firm downward path and there is no need to delay reducing borrowing costs. But the rest of the committee signalled it is still looking for stronger evidence that certain indicators putting pressure on inflation have eased.
These include wage growth and services inflation, which remain relatively persistent. The Bank yesterday slightly upgraded its forecast for UK economic growth.
In its latest Monetary Policy Report, it said gross domestic product (GDP) will increase 0.5 per cent this year and 1 per cent in 2025, both 0.25 percentage points higher than the last estimates published in February.
The improved outlook reflects higher estimates for population growth, which will boost productivity, as well as energy costs coming down. The Bank also expects some positive impact from recent tax cuts, which are set to boost GDP by more than 0.25 per cent points compared with February projections.