Bank of England moves closer to first rate cut since 2020

The Bank of England 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 voted 7-2 to keep rates at a 16-year high of 5.25 percent after Deputy Governor Dave Ramsden joined Swati Dhingra in voting for a cut to 5 percent. Economists polled by Reuters had mostly expected another 8-1 split to keep rates on hold.

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 percent in October 2022.

Since then, headline inflation has fallen back and the BoE expects it slowed to around its 2 percent 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 2 percent.

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.”

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 U.S. 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.

Shortly before the BoE’s announcement on Thursday, financial markets were close to fully pricing a first quarter-point BoE rate cut only in August and another in November or December taking Bank Rate to 4.75 percent, followed by more cuts in 2025.

The BoE sent a fresh message to investors that those bets on rate cuts might be too conservative as it cut its inflation forecasts for two and three years’ time to 1.9 percent and 1.6 percent - below its 2 percent target - from its February projections of 2.3 percent and 1.9 percent.

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.