BoE holds key interest rates at 16-year high-mark of 5.25%, moves closer to first cut since 2020

  • The BoE said on Thursday its Monetary Policy Committee voted 7-2 to keep rates at a 16-year high of 5.25 per cent after Deputy Governor Dave Ramsden joined Swati Dhingra in voting for a cut to five per cent.

Reuters
Published9 May 2024, 05:11 PM IST
Pedestrians walk past the Bank of England in London, U.K. Photographer: Frantzesco Kangaris/Bloomberg
Pedestrians walk past the Bank of England in London, U.K. Photographer: Frantzesco Kangaris/Bloomberg

The Bank of England (BoE) took another step towards lowering interest rates, as a second official backed a cut and Governor Andrew Bailey said he was "optimistic that things are moving in the right direction". The BoE said on Thursday its Monetary Policy Committee (MPC) voted 7-2 to keep rates at a 16-year high of 5.25 per cent after Deputy Governor Dave Ramsden joined Swati Dhingra in voting for a cut to five per cent. 

Economists polled by Reuters had mostly expected another 8-1 split to keep rates on hold. Sterling dropped against the dollar and the euro after the announcement while British government bond yields fell sharply as investors added to their bets on the BoE rate cuts ahead.

Also Read: London FTSE 100 zooms to record high on AstraZeneca COVID-19 vaccine withdrawal

The MPC has now kept rates on hold at six meetings in a row but it hinted that a first cut since March 2020 at the onset of the COVID-19 pandemic could come as soon as its next meeting in June, a potential boost for Prime Minister Rishi Sunak. He has told voters that the economy is turning a corner but is struggling to reduce the opposition Labour Party's big opinion poll lead before an election later this year.

The BoE added a line to its post-meeting statement, saying it would be watching the next rounds of economic data closely. "The Committee will consider forthcoming data releases and how these inform the assessment that the risks for inflation persistence are receding," the BoE said.

“On that basis, the Committee will keep under review for how long Bank Rate should be maintained at its current level.” Over a nearly two-year period from late 2021, the BoE - like other central banks - pushed up borrowing costs to tackle a surge in inflation which peaked at 11.1 per cent in October 2022.

Also Read: ECB Policy Verdict: At 4%, key interest rates held at all-time high for fifth straight meeting, cuts likely ahead

Since then, headline inflation has fallen back and the BoE expects it slowed to around its two per cent target in April, largely because of falling energy prices. But the BoE has remained on guard because of still-strong wage growth and services price inflation which threaten to push inflation back above two per cent. Bailey said the news on inflation had been encouraging.

"We need to see more evidence that inflation will stay low before we can cut interest rates," he said in a statement. “I'm optimistic that things are moving in the right direction.” The pound fell by about a third of a cent against the US dollar immediately after the BoE's decision and statements were published and the yield on two-year British government bonds, which are most sensitive to BoE rate speculation, fell by three basis points. Financial markets fully priced in a first quarter-point BoE rate cut by August and see another in November or December taking Bank Rate to 4.75 per cent, followed by more cuts in 2025.
 

JUNE CUT?

Investors have been trying to work out whether the BoE is likely to cut rates in June - when the European Central Bank has already signalled it will reduce borrowing costs - or, like the US Federal Reserve, will hold out for longer.

On Wednesday, Sweden's central bank cut its key interest rate for the first time in eight years. The BoE sent a fresh message to investors that their bets on rate cuts might be too conservative as it cut its inflation forecasts for two and three years' time to 1.9 per cent and 1.6 per cent - below its two per cent target - from its February projections of 2.3 per cent and 1.9 per cent.

Also Read: US Fed to hold rates at 23-year high-mark until inflation cools, slows pace of balance sheet runoff: 5 key highlights

The BoE's inflation forecasts partly reflect market interest rate expectations in the run-up to its MPC meetings, which now predict fewer cuts this year than in February. Minutes of the BoE's May meeting showed differences between the seven MPC members who voted to keep rates on hold around how persistent inflation pressures would be, and how much more evidence of a slowdown was needed to justify a rate cut.

Ramsden and Dhingra said a cut was needed now because of the time lag in monetary policy decisions impacting the economy and because inflation might fall more than the BoE had forecast.

The MPC's decision to stress the importance of "forthcoming data releases" will add to the focus on the two official labour market reports and the two sets of inflation figures which are due before its next scheduled announcement on June 20. Wage growth and services price inflation of around six per cent remain higher than in the United States or euro zone, even though British economic growth is more sluggish.

The BoE slightly lifted its growth forecasts for Britain's economy, saying it expected 0.5 per cent growth in gross domestic product over 2024, up from 0.25 per cent in its February forecast. It also said a recession in the second half of 2023 had probably ended, offering some relief to Sunak and the Conservative Party as they battle to turn around the opinion polls.

 

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First Published:9 May 2024, 05:11 PM IST
Business NewsEconomyBoE holds key interest rates at 16-year high-mark of 5.25%, moves closer to first cut since 2020

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