The Bank of England has decided to maintain interest rates at 3.75%, but has indicated that further cuts are likely later in the year as inflation is expected to drop back to the Bank’s 2% target sooner than anticipated. This decision was reached after a narrow vote by the Monetary Policy Committee (MPC), with five out of nine members voting to keep rates unchanged, while four members preferred a 0.25 percentage point cut to 3.5%. Governor Andrew Bailey cast the deciding vote in favor of maintaining the current rate.
The close voting margin and the Bank’s stronger language suggest that a rate cut could be on the horizon, possibly as soon as the next MPC meetings in mid-March or early April. Prior to the MPC’s decision, markets had already priced in two rate cuts for the year.
Mr. Bailey commented, «We now anticipate that inflation will decrease to around 2% by spring. This is positive news. We want to ensure that inflation remains at this level, which is why we have chosen to keep rates steady at 3.75% today. If all goes well, there may be room for further rate reductions later this year.»
The Bank’s latest forecast indicates a quicker decline in inflation, with expectations of it reaching 2% in the second quarter of the year, down from 3.4% in December. The forecast attributes this drop to reductions in energy bills announced in the budget, which are projected to decrease inflation by 0.5 percentage points, along with a decrease in food prices.
Chancellor Rachel Reeves announced changes to energy bill calculations last November, estimated to save the average household £150 annually, as well as freezing rail fares and fuel duty. The Bank has also revised its GDP growth forecast from 1.1% to 0.9% for the year, with an expected increase in unemployment to 5.3%, potentially creating space for additional rate cuts.
Despite these factors, the majority of MPC members opted to keep rates unchanged, citing the need to balance the risks of persistent inflation driven by rising wages with the threat of increased unemployment and reduced spending pushing inflation below the 2% target. The committee highlighted that while risks of inflation persistence have decreased, risks from weaker demand and a looser market remain.
The timing of future rate cuts will be determined by the Bank’s assessment of the sustainability of the 2% inflation rate in the medium term. Some members are skeptical that short-term measures announced by Chancellor Reeves will counteract underlying upward pressure on prices. The decision to maintain rates came after Mr. Bailey switched sides from the previous meeting in December, aligning with members in favor of keeping rates unchanged.
In December, Mr. Bailey had voted with the four dovish members of the MPC who favored a rate cut: Sarah Breedon, Swati Dinghra, deputy-governor Dave Ramsden, and Alan Taylor.
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