Bank of England Signals Potential Interest Rate Cuts Amid Positive Inflation Trends

Bank of England Signals Potential Interest Rate Cuts Amid Positive Inflation Trends
credit: reuters

London (Parliament News) – The Bank of England holds rates at 5.25%, hints at potential cuts in June due to positive inflation trends and economic outlook. Members divided, two voting for an immediate cut. Governor suggests June cut possible.

The Bank of England has hinted it could start cutting interest rates as early as June after inflation was seen to be “moving in the right direction”, as it maintained borrowing costs on hold at 5.25% for the sixth time in a row. Alongside the conclusion to keep rates on hold, the Bank stated inflation was already on course to hit its target of 2% and would drop to just 1.6% in two years, opening the door to prospective cuts in interest rates.

What influenced the Bank of England’s decision on rates?

Giving a more positive assessment of the economic outlook than in its February report, the Bank also indicated the UK recession had ended, predicting the economy had increased 0.4% in the first three months of the year. The Office for National Statistics is to publicise the official estimate of growth on Friday.

Members of the Bank’s nine-strong rate-setting monetary policy committee (MPC) were divided on the decision to hold interest rates, with two members – Swati Dhingra and Dave Ramsden – voting for an instantaneous cut to 5%. Dhingra was the lone vote calling for a rate cut at the previous meeting of the MPC.

Andrew Bailey, the Bank’s governor, suggested that a rate cut at its next meeting in June was a possibility. “Before our next session in June, we will have two full sets of data – for inflation, movement and the labour market – that will help us in driving that judgment afresh,” he said. 

“But, let me be clear, a change in bank rate in June is neither ruled out nor a fait accompli.”

What factors drove BOE’s decision on inflation?

The Bank stated a modest economic turnaround was doubtful to be inflationary, leaving the UK on course for several rate cuts this year. Before the Bank’s latest decision and report on Thursday, financial markets had been pricing in two rate cuts this year, with the first in August.

Bailey stated: “With the progress we’ve made, to make sure inflation stays about the target, it is likely that we’ll need to cut bank rates in the forthcoming quarters, possibly more so than is currently priced into markets.”

A modest growth in unemployment over the next year is anticipated to lead to easing wage growth across the private sector, reducing the pressure on prices.

Bailey stated that at this point the MPC voted to wait and see after a plurality agreed there needed to be more proof of inflationary pressures remaining subdued.

“We’ve had inspiring news on inflation and we think it will fall close to our 2% target in the next couple of months,” he said. “We need to see more proof that inflation will stay low before we can cut interest rates. I’m bright that things are moving in the right direction.”

Inflation dropped to 3.2% in March, according to official figures and is anticipated to have fallen to 2% in April after a decline in the energy price cap, bringing down monthly household bills.

What risks does BOE see in the Middle East conflict?

The Bank said inflation would be rough this year after a rise towards an average of 2.5% in the second half of 2024, before dropping again in 2025 and 2026 to 1.6%. Increasing worries that the conflict in the Middle East will widen and also disrupt shipping on major trade routes, raising prices, had so far been unsubstantiated but remained a risk to the outlook, the Bank said in its latest report.

Federica Calabrò

Federica Calabrò is a journalist at Parliament News, She is covering Business and General World News. She is a native of Naples, commenced her career as a teller at Poste Italiane before following her passion for dance. Graduating in classical dance, she showcased her talents with two entertainment companies, enchanting audiences throughout Italy. Presently, Federica serves as the general secretary at the Allianz Bank Financial Advisors financial promotion center in Naples. In this capacity, she manages office forms, provides document assistance for Financial Advisors, oversees paperwork for the back office, and ensures smooth customer reception and assistance at the front office. Outside her professional obligations, Federica indulges in her passion for writing in her leisure time.