The Bank of England has left interest rates unchanged at 5.25% for the fifth consecutive time, but signalled that cuts are on the horizon amid 'encouraging signs' of falling inflation. Financial markets anticipate three quarter-point reductions this year, with the first expected in June, and a survey of financial firms suggests rates could fall to 4.5% by the end of 2024.
Inflation has dropped sharply from a peak of 11.1% in October 2022 to 3.4% in February, though 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 of 0.25 percentage points – the first time since September 2021 that no member voted for a rise.
Governor Andrew Bailey said: 'In recent weeks we've seen further encouraging signs that inflation is coming down. We've held rates again because we need to be sure that inflation will fall back to our 2% target and stay there. 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, with sterling down 0.6% to $1.27 and 0.2% lower against the euro at €1.16. The MPC expects economic growth to pick up in the second quarter after the UK entered recession in the second half of 2023, with higher disposable incomes and business investment boosting demand.
However, the Bank cited high pay rises and persistent inflation in the services sector as reasons for delaying cuts. It also warned that an escalation in the Middle East conflict poses a big risk to prices. Critics argue the Bank has been too cautious, with the IPPR's Carsten Jung saying it 'tightened the screws too much', and ICAEW's Suren Thiru warning that keeping policy tight risks prolonging economic struggles.
