The Bank of England (BoE) has indicated the possibility of reducing interest rates this year after maintaining the policy rate of 5.25 percent, a 15-year high, for the fourth consecutive meeting. The Bank also revised its inflation forecasts downwards.
The Monetary Policy Committee (MPC), headed by Governor Andrew Bailey, took a divergent decision by a 6-3 vote to maintain the current bank rate. The financial markets are now predicting a potential rate cut as early as June, considering that interest rates have seemingly reached their apex.
In its latest policy statement, the BoE refrained from mentioning further strict measures. Six members of the MPC were of the opinion that it was appropriate to retain the current rate in this session.
On the economic front, headline inflation has decreased significantly and the rigid policy approach is placing a burden on economic activity, resulting in a less tense labor market. However, the MPC majority pointed out that significant inflation markers remained high, even though services price inflation and wage increase have fallen beyond expectation.
There was a split in opinions among the MPC members. While Jonathan Haskel and Catherine Mann advocated for a 0.25 percentage-point increase to 5.50 percent, Swati Dhingra recommended a reduction of the same quantum. Haskel and Mann believe that a rate hike is necessary to control inflation and to ensure it returns to the target level over the long term.
In contrast, Dhingra opines that the bank rate must be less restrictive at present. The projections suggest a temporary decrease of inflation to the target of 2 percent in the second quarter before it rebounds in Q3 and Q4. The GDP growth is estimated to hover around 0.1 percent in Q1 of 2024 and continue at a similar rate in the subsequent quarters, largely due to the lessening impact of previous rate hikes.
Economists from Capital Economics and ING have a different outlook on the timeframe for potential rate cuts. Paul Dales of Capital Economics suggests that a rate cut in June is plausible, with the rates potentially dropping to 3.00 percent by 2025. In contrast, economists from ING predict the start of a rate cut cycle as late as August, when sufficient economic data will be available for the BoE to make an informed decision.
