- Written by Diabail Jordan & Faisal Islam
- BBC news
The Bank of England kept interest rates unchanged at 5.25%, but signaled it was gradually moving towards reducing borrowing costs.
The central bank said at a recent meeting that it discussed cutting interest rates, with inflation, the pace at which prices are rising, expected to fall rapidly this year.
But the governor said he would wait for solid evidence that inflation was under control before acting.
For the first time since the 2020 coronavirus pandemic, a central bank policymaker has voted in favor of an immediate interest rate cut.
However, while Swati Dhingra voted for a rate cut to 5%, two members of the Monetary Policy Committee (MPC) supported a rate hike to 5.5%. The remaining six members voted to keep interest rates unchanged.
This is the first time since the 2008 financial crisis that the three parties have divided opinions on whether to raise or lower interest rates.
The central bank has been steadily raising interest rates over the past few years in an effort to curb inflation, with the last hike coming in August last year.
Higher interest rates make borrowing more expensive and cool inflation by discouraging people and businesses from borrowing to cover their expenses.
The inflation rate has fallen sharply since its 40-year peak in October 2022, and currently stands at 4%.
The World Bank is responsible for keeping inflation at or near its target of 2%.
The latest inflation report predicts that the economy will return to this target between April and June this year, which is faster than previously expected.
“There has been some good news on inflation over the past few months,” central bank governor Andrew Bailey said.
The central bank’s latest announcement also removed the previously used phrase “further tightening of monetary policy,” which is seen as an indication that no further interest rate hikes are expected.
However, while the central bank has suggested that interest rates have now peaked, Mr Bailey suggested that a cut could still be several months away.
“Before we cut rates, we need to see further evidence that inflation will fall to our 2% target and remain there,” he said.
The central bank expects inflation to pick up slightly over the summer, and Bailey told a central bank press conference that this was “not an acceptable situation”. This suggests that rate cuts may not happen as quickly as most expected.
Treasurer Jeremy Hunt said: “It’s obviously very positive news for households with mortgages that interest rates appear to have peaked, but we must remember that inflation never falls in a straight line. ” he said.
Some economists believe that the fall in inflation towards the central bank’s target is “artificial” due to lower energy price caps, and that rising global energy prices have led to a slight rise in inflation over the summer. There are concerns that it may recover.
Moreover, wage growth remains strong, with a World Bank survey of hundreds of companies showing that wage settlements will rise by 5.4% this year.
Economist Dr Dhingra, who voted in favor of the rate cut, pointed to geopolitical risks and the fact that interest rate decisions take a long time to impact the economy.
New forecasts from the central bank show that keeping interest rates at current levels could push the barely growing economy into full recession.
Paul Dales, chief UK economist at Capital Economics, said the Bank was “sending soft signals that we are moving to the next stage”. [interest rate] The move would result in a rate cut, but they pushed back harder against the idea that a rate cut was coming soon or far. ”
However, Mr Dales said he expected the decline in inflation to accelerate further and that the central bank would “change course in the coming months”.
“There is still a possibility of a June rate cut, and we believe that interest rates will end at 3% in 2025,” he said.
Yael Selfin, chief economist at KPMG UK, said the central bank would be wary of keeping interest rates too high for too long, “especially given that the effects of the last rate hike have not yet filtered through to the economy.” He said it would be.
“However, we expect the central bank to pause for some time yet before starting to cut rates,” he said. “Reductions could occur after the summer.”