The Bank of England has held interest rates at 5.25% for the fifth consecutive time, but policymakers have signalled that at least three cuts could be on the horizon this year. Financial markets expect the first reduction of 0.25 percentage points in June, with rates predicted to fall to 4.5% by the end of 2024, according to the Bank's survey of financial companies.
Inflation has fallen sharply in recent months, dropping to 3.4% in February from a peak of 11.1% in October 2022. However, it remains above the Bank's 2% target. Eight members of the Monetary Policy Committee voted to hold rates, while Swati Dhingra backed a cut. It was the first time since September 2021 that no one voted for a rise.
Governor Andrew Bailey said: “In recent weeks we’ve seen further encouraging signs that inflation is coming down. We’re not yet at the point where we can cut interest rates, but things are moving in the right direction.” The pound fell against the dollar and euro after the announcement.
The MPC expects economic growth to pick up in the second quarter, after the UK entered a recession in the second half of 2023. Higher disposable incomes and business investment are expected to boost demand, but a fuel duty freeze and falling energy and food prices are likely to push inflation below 2% in the second quarter.
Economists expressed mixed views. Martin Beck of the EY Item Club said the case for cutting rates soon remained strong, while Carsten Jung of IPPR argued the Bank had “tightened the screws too much”. Suren Thiru of ICAEW warned that keeping policy too tight could prolong economic struggles.
