Borrowing verdict

Inflation ‘will fall to 2% in Q2’ as Bank holds rates

Andrew Bailey
Andrew Bailey and other MPC members held interest rates

The Bank of England has kept interest rates unchanged and says inflation will fall ‘temporarily’ to 2% in the second quarter before rising again.

With price growth still relatively high the monetary policy committee was always likely to maintain the current 5.25% base rate and the nine members voted by a majority of 6–3 to maintain Bank Rate at 5.25%.

Two members preferred to increase Bank Rate by 0.25 percentage points, to 5.5%. One member preferred to reduce Bank Rate by 0.25 percentage points, to 5%.

Bank Rate is now forecast to decline from to around 3.35% by the end of the forecast period, almost 1 percentage point lower on average than in the November Report.

In its latest report the MPC says that since the previous meeting, global GDP growth has remained subdued, although activity continues to be stronger in the United States. Inflationary pressures are abating across the euro area and United States. Wholesale energy prices have fallen significantly. Material risks remain from developments in the Middle East and from disruption to shipping through the Red Sea.

Following recent weakness, GDP growth is expected to pick up gradually during the forecast period, in large part reflecting a waning drag on the rate of growth from past increases in Bank Rate. Business surveys are consistent with an improving outlook for activity in the near term.

The labour market has continued to ease, but remains tight by historical standards. In the February Report projections, the continuing relative weakness of demand, despite subdued supply growth by historical standards, leads a margin of economic slack to emerge during the first half of the forecast period. Unemployment is expected to rise somewhat further.

Twelve-month CPI inflation fell to 4% in December 2023, below expectations in the November Report. This downside news has been broad-based, reflecting lower fuel, core goods and services price inflation. Although still elevated, wage growth has eased across a number of measures and is projected to decline further in coming quarters.

CPI inflation is projected to fall temporarily to the 2% target in 2024 Q2 before increasing again in Q3 and Q4.

Alastair Douglas, CEO of TotallyMoney, said: “While the policy is to set higher rates to reduce consumer spending, many simply don’t have the money to get by without borrowing. One in five are struggling to heat their homes, and a third are having difficulties with rent and mortgage payments. It’s having a considerable impact on people’s wellbeing, and is disproportionately impacting the vulnerable and minority groups.

“Meanwhile, insolvencies have risen to their highest levels in 30 years, and businesses are teetering on the brink as they struggle to keep up with the combination of increased costs and weaker consumer confidence. 

“From the start of the cost of living crisis, the Bank of England’s forecasts have been poor at best — and for households and businesses up and down the country, a rate cut can’t come quick enough.”

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