- Written by Michael Race
- BBC News business reporter
image source, Getty Images
The Bank of England governor said he needed to “see more evidence” that price rises were slowing further before cutting interest rates.
Andrew Bailey said he was “optimistic that things are moving in the right direction” as interest rates remain unchanged at 5.25%.
He said the central bank expected inflation, the measure of interest rate increases, to fall “close to” its target level in the coming months.
This could pave the way for a rate cut as early as June.
However, August or September seems the most likely timing.
The interest rate set by the bank determines the interest rate set by high street banks and lenders. Interest rates are currently at their highest level in 16 years, meaning people are paying more for borrowing such as mortgages and loans, but savers are also getting better returns.
Mr Bailey said there was “encouraging news” that inflation, currently at 3.2%, needed “further evidence” to stay low before cutting rates.
The Monetary Policy Committee, which votes on interest rates, is made up of nine members, with two voting in favor of lowering interest rates and the remaining seven voting in favor of keeping interest rates unchanged, moving the country closer to lowering interest rates. It looked like.
The bank is more positive about the outlook for the UK economy in its latest forecast, predicting:
- Inflation is expected to fall to the central bank's target of 2% in the coming months, and to 1.9% in 2026.
- Economic growth in the first three months of 2024 was 0.4%, and from April to June 0.2%
Following the central bank's latest comments, financial markets now expect interest rates to be cut to 5% by August, and then to 4.75% in November or December. Further rate cuts are expected in 2025.
The central bank began raising interest rates in December 2021 and has kept interest rates unchanged at 5.25% since last summer in a bid to slow the pace of rise in consumer prices and ease the cost of living.
Prices began to rise rapidly as coronavirus-related restrictions were lifted and demand for the product increased. Russia's invasion of Ukraine then sent energy and food prices soaring, pushing inflation to more than 11% in October 2022, the highest level in 40 years.
Electricity bills and rates have since fallen, but are not expected to fall further.
By making borrowing more expensive, the World Bank hopes to encourage people to cut spending, thereby reducing demand for goods and moderating price increases.
However, this is a balancing act, as high interest rates can have a negative impact on the economy and limit growth, as companies refrain from investing in production and employment.
The UK fell into recession at the end of last year, with the economy contracting for the second consecutive three-month period, but the central bank expects this to be confirmed in official figures to be released on Friday, indicating that the economic slump is already over. He expressed the view that there may be.
The bank said it expected the economic situation to improve slightly this year, due in part to a growing population and some measures in the government's spring budget, including cuts to national insurance contributions.
“Consumer confidence has been on an upward trend for most of the past year,” the World Bank said, but added that business investment remained “subdued” due to weak demand and “uncertainty.”
The central bank said pension-adjusted household savings rose to the highest level since 1997, excluding the pandemic.
The health of the UK economy is in the spotlight, and economic policy is likely to be a key battleground for votes in the next general election, expected by the end of this year.
Chancellor Rishi Sunak has previously said 2024 will be “the year of economic recovery” and said the country has “turned the corner”, but many household budgets remain under pressure.
But Labor accused the government of “gaslighting” people over the economic situation.
