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The Bank of England kept borrowing costs at a 16-year high of 5.25%, but signaled it would cut interest rates this summer if inflation remains low.
Governor Andrew Bailey told a press conference on Thursday that a rate cut at the next Monetary Policy Committee meeting in June was neither “ruled out” nor a “fait accompli”.
But he added: “We will probably need to reduce bank rates over the next few quarters.” . . May be higher than current market interest rates. ” Traders now expect the BoE to cut interest rates by two 0.25 percentage point points by December.
ING economist James Smith said there was a “clear sense of optimism” in the BoE's message, and although the result did not clearly support a rate cut in June, he said the central bank was “prepared for its first rate cut”. “We are very close to that,” he said. .
The MPC voted 7-2 to keep the benchmark rate unchanged at 5.25%, with Deputy Governor Sir Dave Ramsden joining external member Swati Dhingra in voting for an immediate reduction.
A Reuters poll of economists had predicted only one vote in favor of a rate cut, as at the previous MPC meeting in March.
Bailey said there was “encouraging news” on inflation and that inflation would move closer to the central bank's 2% target in the coming months, but warned the BoE was not yet ready to take action. did.
“We need to see further evidence that inflation will remain low before cutting rates,” he said. “I'm optimistic that things are moving in the right direction.”
He added that the MPC now expects underlying inflation pressures to weaken “slightly faster” than previously assumed.
In new language, the MPC said it would “consider future data releases” that reference inflation and employment data in determining whether “the risks of sustained inflation have receded.”
The data will be released ahead of the June 20th MPC meeting.
The timing of the Bank of England's first interest rate cut in four years has sparked a major political controversy ahead of this year's expected general election. Chancellor Rishi Sunak is trying to convince voters that Britain has emerged from the cost of living crisis.
European central banks are also preparing to leave the US Federal Reserve by cutting interest rates in the coming months, predicting that inflation will not be as persistent as in the US, where demand is strong.
Mr. Bailey sought to counter market views that a delay in reducing U.S. borrowing costs could cause the BoE to delay its first interest rate cut.
“There is no law that says the Fed will act first,” he said.
However, the Bank of England is wary of a premature rise in interest rates after hard-earned pressure to push prices up from double-digit levels to the current 3.2% rate.
Investors see a roughly 45% chance of a rate cut by June, about the same as before Thursday's announcement.
The yield on two-year bonds, which is sensitive to interest rates, fell by 0.02 percentage point to 4.29% after the decision. The blue-chip FTSE 100 index rose 0.3% on expectations for a rate cut this summer.
Minutes from this week's meeting continued to divide opinion within the MPC, noting there was a “range of views” on how long inflation was likely to persist and how much evidence was needed to cut interest rates. It was also shown that
Mr Ramsden and Mr Dhingra told the MPC meeting that inflation was on a “definite downward trajectory” and that interest rates “need to be eased now”.
However, the MPC said service price inflation remained “high” at 6% and “considerable uncertainty” surrounding official employment figures made it difficult to gauge developments in the labor market.
In a forecast published Thursday, the bank said it expected inflation to fall to its 2% target in the second quarter, but rise again to 2.6% in the second quarter of 2025.
It then predicted that the inflation rate would fall to 1.9% in two years and 1.6% in 2027.
These below-target inflation forecasts indicate that future rate cuts may be steeper than the market expects.
The bank estimates the UK economy returned to growth of 0.4% in the first quarter and forecasts growth of 0.2% in the second quarter.
However, the overall situation remains weak, with GDP expected to grow by just 0.5% this year, accelerating to 1% in 2025 and 1.25% in 2026.
Additional reporting by Oliver Ralph
