Did cooling inflation lead to a rate cut?
The Bank of England (BoE) decided to maintain interest rates at their 16-year high of 5.25% on Thursday, despite annual inflation slowing to its lowest rate in nearly two and a half years.
In a widely expected move, the central bank’s Monetary Policy Committee (MPC) kept the base rate steady for the fifth time in a row, continuing its stance after initiating a series of increases starting in December 2021, when the rate was historically low at 0.1%.
The rate hikes came as the BoE tried to combat rising inflation, which peaked at a 41-year high of 11.1% in October 2022. The annual inflation rate has since gone down gradually, with yesterday’s consumer price index figures showing it has drawn closer to the BoE’s 2% target at 3.4% – the lowest since September 2021.
In February, the Bank of England said it expects inflation to return to the target rate between April and June this year – around 18 months ahead of its earlier forecasts.
With inflation on a downward trend and the base rate kept on hold since the September 2023 MPC meeting, economists and industry experts have pondered when the first base rate cut will come.
“Today’s announcement regarding bank rate aligns with market expectations, despite the favourable UK inflationary data released yesterday and surpassing economists’ forecasts,” said Nicholas Mendes, head of marketing at independent mortgage broker John Charcol. “The Bank of England had already indicated that there would be no surprise rate cut this month, but it is anticipated that the first reduction will happen imminently.
“Market sentiment, however, suggests that any reduction in the bank rate is not likely until at least June, with a growing proportion of investors now eyeing August. This projection also takes into consideration the movements of the US market and the historical tendency for decisions to align with those of the Federal Reserve, which didn’t cut rates yesterday, also.”
Henk Potts, market strategist at Barclays Private Bank, said the MPC would likely be laser-focused on the incoming inflation prints, labour market reports and growth figures for the first quarter.
“These could pave the way for a pivot to an easing stance by the May meeting, with the first 25bp rate cut pencilled in for June,” he stated. “With more to follow, we anticipate that the bank rate will finish the year at 4%.”
Any thoughts on the latest base rate decision announced by the Bank of England today? Share them with us by leaving a comment in the discussion box at the bottom of the page.
