The Bank of England’s Monetary Policy Committee has voted to hold interest rates for the sixth time in a row. Members of the MPC voted 7 – 2 to maintain the base rate at 5.25 per cent – with two members voting to cut rates by 0.25 percentage points. This decision will come as no surprise to the markets, which had already factored in a rate hold. The Bank made clear in March that key indicators – including the state of the UK labour market and the risk of inflation rising again – would influence its decision, none of which dramatically changed in the last seven weeks.
The Committee repeats from previous reports that monetary policy must ‘remain restrictive for sufficiently long to return inflation to the 2 per cent target sustainably in the medium term’. Despite the Bank expecting inflation to have fallen back close to target in April (we’ll find on 22nd May), concern remains over persistent inflation in the future. The Bank’s latest forecasts expect inflation to rise again to around 2.5 per cent by the end of the year ‘owing to the unwinding of energy-related base effects’. The Bank remains clear that when rate-cutting begins it is going to be a slow and steady process. The MPC now estimates that the bank rate will decline to 3.75 per cent by the end of its forecast period, 0.5 percentage points higher than forecast in February.
Still, one should note that the Bank’s inflation forecasts have improved slightly from February: Threadneedle Street now expects inflation in two years’ time to sit at 1.9 per cent (just below target), down from its last forecast of 2.3 per cent. Furthermore, the Bank does not expect the inflation rate to rise above 2.6 per cent next year. But this shows just how hawkish the Bank has become: having previously misjudged the inflation crisis so badly, even a slowing inflation rate is not (yet) enough for the Bank to pivot away from a base rate that currently sits at a 16-year high.
However, there remain signs that a rate cut is coming – just not yet. This includes a shift in voting. While the MPC’s members firmly came down on the side of holding rates, two members voted for a cut this time, compared to one member back in March. The case for a 0.25 percentage point cut, as made in today’s report, is largely linked to the gradual cooling of the labour market: job vacancies continue to fall and nominal pay hikes continue to slow.
And while the Committee emphasised multiple times that rates must remain restrictive for some time, it also noted again that ‘the stance of monetary policy could remain restrictive even if Bank Rate were to be reduced, given that it was starting from an already restrictive level.’ In other words, a slow and steady rate cut is seen as compatible with keeping inflation under control.
‘We’re now getting back to more normal times’ the Bank’s governor Andrew Bailey said, following this afternoon’s rate announcement. ‘We need to see more evidence that inflation will stay low before we can cut interest rates,’ he remarked, while adding ‘I’m optimistic that things are moving in the right direction.’ The Governor’s comments have already been interpreted as a hint that a summer rate cut is coming, but whether that’s delivered at the meeting in June or August will have big implications – not least for the government, which is banking on economic improvements this summer that allow voters to feel a bit better off.
The Bank did firmly hint at one improvement – not on rates, but on economic growth. Today’s minutes forecast that ‘UK GDP is expected to have risen by 0.4 per cent in 2024 Q1 and to grow by 0.2 per cent in Q2’ – all but confirming tomorrow’s growth update, which is expected to show that the UK left recession behind in 2023.
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