Bank of England keeps interest rate at 5.25% but cut moves closer
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The Bank of England interest rate has been kept at 5.25% for a fifth consecutive time, but says the prospects for a cut are “moving in the right direction”.
The nine-member rate-setting committee continued to collectively judge it was too early to contemplate a downwards move, despite further progress in taming inflation revealed earlier this week.
However, two members who had previously voted for a rate hike dropped that view.
It meant that eight of the nine supported no change while one other member Swati Dhingra backed, for the second meeting in a row, a reduction to 5%.
Money latest: Reaction to Bank of England’s interest rate decision
The minutes of the meeting made it clear the Bank was still worried about the outlook for inflation.
While the pace of price growth in the economy is well down on the 11% witnessed at the height of the energy-driven cost of living crisis, a headline reading of 3.4% remains well above the Bank’s target of 2%.
The committee is particularly worried that strong wage growth – riding well above the inflation rate at 6% – will stoke demand in the economy and create further inflationary pressures.
While inflation is expected to fall below the target rate in April, mostly due to plunging energy bills but also the latest fuel duty freeze, Bank forecasts have suggested the figure will creep up again.
It wants more vision on the picture ahead as global oil costs rise. Other concerns include price increases linked to disruption to shipping through the vital Suez Canal transit.
Financial markets currently see a chance of a Bank of England rate cut in April but bets are mostly focused on June.
Economists see August being most likely.
The prospect of cuts would be welcome for the economy as a whole after the impact of 14 consecutive rate hikes – the medicine dished out by the Bank to bring down inflation – hit the economy hard.
Rate rises are a blunt tool designed to help prices ease by choking economic activity.
Higher borrowing costs exacerbated the squeeze on household and business budgets, with the country entering recession during the second half of 2023.
The UK is expected to have exited recession in the first quarter of this year – partly on the basis of hopes that rate cuts are coming.
Mortgages rates, for example, are down on where they ended 2023 and spending has picked up.
The Bank is anxious to avoid a recovery for growth if inflation is still running hot.
The near-10% rise in the National Living Wage next month is among the challenges it faces. More recent private sector wage settlements are around the 5% level, on average.
