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Bank holds rates but points to first cut in summer

Andrew Bailey
Andrew Bailey: encouraging news

The Bank of England has held interest rates and indicated that a cut is coming, either at its next meeting in June, but more likely in August.

Members of the Bank’s Monetary Policy Committee (MPC) voted by a majority of 7–2 to maintain Bank Rate at 5.25%. It was the sixth consecutive decision to hold.

Swati Dhingra and Dave Ramsden voted to reduce Bank Rate by 0.25 percentage points, to 5%.

Andrew Bailey, governor of the Bank of England said: “We’ve had encouraging news on inflation and we think it will fall close to our 2% target in the next couple of months. 

“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.”

He told a press conference that the “big global shocks” that caused inflation to rise have “faded”.

He added that he expects falling energy prices to show that inflation fell further in April, but warns the Bank will look at the future releases on price rises – there are two before June – “to be sure inflation will fall all the way back to 2% target and stay there”.

The Institute of Directors said it is “disappointed” by the Bank’s decision to hold rates, saying that two-thirds of respondents to a survey wanted a cut.

“The UK economy remains fragile… [and] inflation is forecast to come down sharply in the coming months,” said Roger Barker, its director of policy. “In our view, these conditions would have justified an early interest rate cut.”

Anna Leach, deputy chief economist, CBI, said the decision to hold rates is in line with the CBI’s expectation that the MPC want to see more evidence that past falls in domestic inflationary pressure are sustainable before they’ll move to cut rates.

“Services inflation and wages data both suggest a cautious approach is warranted. Inflation in the services sector is triple the inflation target and average earnings growth is still running at around double the rate consistent with the inflation target.  

Inflation in the services sector is rising at three times target (pic: Terry Murden)

“With the economy appearing to be moving out of recession – albeit anaemically – there is a delicate balance to be struck between managing inflationary pressures and not snuffing out a nascent recovery.

“It is noteworthy that the Bank judge that demand growth is going to run behind supply growth over the next couple of years. Overall, today’s release does not change our view that the first rate cut is most likely to be in August.”

The Bank said UK GDP is expected to have risen by 0.4% in 2024 Q1 and to grow by 0.2% in Q2. Despite picking up during the forecast period, demand growth is expected to remain weaker than potential supply growth throughout most of that period. 

It added that “there remains considerable uncertainty around statistics derived from the ONS Labour Force Survey” and “it is therefore more difficult to gauge the evolution of the labour market.”

Based on a broad set of indicators, the MPC judges that the labour market continues to loosen but that it remains relatively tight by historical standards.

Annual private sector regular average weekly earnings growth declined to 6% in the three months to February, although that series tends to be volatile. Alternative indicators also suggest easing pay growth.

Jeremy Batstone-Carr, European strategist at Raymond James Investment Services, said that since the MPC’s last meeting, headline and core inflation have dipped, with the descending trend expected to continue.

“April’s CPI data on May 22 is expected to show that price increases have fallen sharply, laying the ground for rate cuts the following month,” he said.

“Although the labour market has shown signs of loosening, providing additional encouragement to the MPC, the possible inflationary consequences of a rate cut remain concerning to some the rate-setters.

“The Committee thus remains divided on the road ahead, with some finding that the pace of deflation is still too slow for comfort.”

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