- Written by Derbil Jordan and Faisal Islam
- BBC News
The Bank of England kept interest rates at 5.25% but indicated it was moving towards lowering borrowing costs.
At its last meeting, the bank said it discussed cutting interest rates, with inflation – the pace of rising prices – expected to decline quickly this year.
But the bank governor said he would wait for hard evidence that inflation is under control before doing so.
For the first time since the 2020 Covid pandemic, a bank policymaker voted in favor of an immediate cut.
However, while Swati Dhingra voted in favor of cutting interest rates to 5%, two members of the Monetary Policy Committee (MPC) supported increasing interest rates to 5.5%. The remaining six members voted to keep interest rates unchanged.
This is the first time there has been a three-way split on whether interest rates should be raised, lowered or suspended since the 2008 financial crisis.
The bank has been raising interest rates steadily over the past two years in an attempt to reduce inflation, and the last interest rate hike was in August last year.
High interest rates cool inflation by making borrowing more expensive, discouraging people and businesses from borrowing to finance spending.
Inflation has fallen sharply from a 40-year high in October 2022 and is currently at 4%.
The bank is tasked with keeping price growth at or near the 2% target.
He said in his latest inflation report that the number would fall to that target between April and June this year – faster than previously expected.
Bank Governor Andrew Bailey said: “We have received good news about inflation over the last few months,” and told the BBC that he was “optimistic” that inflation was heading in the right direction.
The bank’s latest release also dropped the phrase it had previously used about “further monetary policy tightening,” which was seen as a signal that no further interest rate hikes were expected.
But while the bank now indicates interest rates have peaked, Bailey noted that any rate cut may still be a few months away.
“We need to see more evidence that inflation is set to fall to the 2% target, and remain there, before we can cut interest rates,” he said.
The bank expects a slight rebound in inflation during the summer, and at the bank’s press conference, Bailey said that this is “not an acceptable situation.”
This suggests that any interest rate cut may not come as quickly as many expect.
Treasurer Jeremy Hunt said: “It is clearly very positive news for families with mortgages as interest rates appear to have peaked, but we must remember that inflation never falls in a straight line.”
There is concern among some economists that the decline in inflation towards the bank’s target is “artificial”, due to the lowering of the energy price cap, and that inflation will rebound somewhat over the summer as global energy prices rise.
In addition, wage growth remains strong, with the bank’s survey of hundreds of companies indicating a 5.4% rise in wage settlements this year.
Dr. Dhingra, the economist who voted for the cut, pointed to risks from geopolitics and the fact that interest rate decisions take a long time to impact the economy.
The bank’s new forecasts suggest that keeping interest rates at their current level could push the barely growing economy into a full recession.
Paul Dales, chief UK economist at Capital Economics, said the bank “sent some weak signals that what’s coming is next”. [interest rate] “This move would be a cut, but it is more strongly opposed to the idea that interest rates will be lowered soon or far away.”
However, Dales said he expected a faster decline in inflation and expected the bank to change its approach in the coming months.
He added: “A June interest rate cut is still possible and we believe interest rates will end in 2025 at 3%.”
Yael Selvin, chief economist at KPMG UK, said she believed the bank would be wary of keeping interest rates too high for too long, “particularly with the impact of previous interest rate hikes yet to impact the economy.”
“However, we expect the bank to pause for some time before starting to cut interest rates,” she added. “Reductions could happen from the summer onwards.”