Governor Andrew Bailey opens the door to a first rate cut in June, but warns it’s “not a fait accompli”.
The Bank of England left its key interest rate unchanged on Thursday for the sixth straight meeting, but signalled that the time for an easing of policy is now approaching.
The Bank’s Monetary Policy Committee voted 7-2 in favor of holding the Bank Rate at 5.25 percent, with Deputy Governor Dave Ramsden joining Swati Dhingra in voting for an immediate quarter-point cut.
“We’ve had encouraging news on inflation and we think it will fall close to our 2 percent target in the next couple of months,” Governor Andrew Bailey said in a statement accompanying the announcement. “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.”
The Bank said it now sees growth slightly higher, and inflation a little lower, over the next couple of years, owing to a slight upward revision to its assumptions on population growth, and also due to measures taken in this year’s budget. One of the MPC’s key judgments at its meeting was that inflation pressures would ease by slightly more than previously expected.
The Bank’s next policy meetings are on June 20 and August 1. Financial markets expect a first cut no later than August, while a sizeable minority expect it in June. Sterling interest rate futures imply a high chance of three quarter-point cuts by year-end.
In opening remarks at his press conference, Bailey said that data between now and its June meeting may give it more confidence that inflation is beaten, but warned that “a rate cut in June is neither ruled out nor a fait accompli.”
The decision comes at a time when inflation is running at a two and a half year low of 3.2 percent. The Bank expects it to fall to its 2 percent target in the course of this year, due largely to a drop in regulated household energy bills. The Bank’s new forecasts show it rebounding to around 2.5 percent later this year as various base effects from a year ago pass out of the calculations.
The decision also comes a day ahead of preliminary data that are expected to confirm that the U.K. economy grew for the first time in a year in the first quarter of 2024, emerging from a shallow recession over the second half of 2023. The Bank expects gross domestic product to have grown by 0.4 percent through March.
“Inflation in the UK has been propped up by purely technical factors which can be predicted to reverse with a very high degree of confidence,” UBS Wealth Management global chief economist Paul Donovan said in a morning note, before the decision.
However, many on the MPC, including chief economist Huw Pill, are still concerned that inflation may not behave, given that wage growth is still strong.