Kate Andrews Kate Andrews

Interest rate cuts are on the horizon

Bank of England governor Andrew Bailey (Credit: Getty images)

The Bank of England (BoE) has held interest rates at 5.25 per cent for the fourth time in a row. This is no big surprise: with inflation ticking back up slightly on the year to December (rising to 4 per cent) – continued trade disruption in the Red Sea last month is expected to have some impact on prices – it was unlikely that the Monetary Policy Committee was going to start a rate-cutting spree so early in the year.

Instead, the hints are in the language used by the Monetary Policy Committee (MPC) in its report. Markets were looking for clear indication that rate cuts are coming. The BoE has delivered this, making clear that the process may not be as fast or radical as many were hoping it would be.

The MPC continues to lean hawkish, as it works to get inflation back to the target of 2 per cent. Like other independent forecasters, the Bank is now optimistic that inflation will slow to this level by this spring, but it is not convinced it will stay there. It is expecting an uptick in inflation in the second half of 2024 – due to persistent ‘domestic inflationary pressures’ and energy prices – which are expected to keep inflation slightly above target for the rest of the Bank’s forecast period.

As a result, the report emphasised that rates ‘will need to remain restrictive for sufficiently long to return inflation to the 2 per cent target sustainably in the medium term in line with the MPC’s remit’. In other words, it’s not simply about returning to target, but about the Bank feeling confident it can stay around the target in the long run.

Granted, this uptick in inflation is not expected to be anything like what we’ve just experienced. The BoE expects inflation to be closer to 3 per cent by the end of this year and just above 2 per cent in two year’s time.

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