The Bank of England edged closer to cutting interest rates from a 16-year high after a second policymaker voted for lower borrowing costs and Governor Andrew Bailey said he was "optimistic that things are moving in the right direction."
Deputy Governor Dave Ramsden joined external member Swati Dhingra in calling for an immediate cut in the base rate from its current level of 5.25%. The other seven members of the Monetary Policy Committee preferred no change, saying they needed more evidence that inflation will be subdued.
It was the sixth meeting running that the UK central bank left its benchmark lending rate firmly in territory it describes as restrictive, aiming to bear down on wage and price pressures that reached a four-decade high in late 2022. Forecasts released with the decision suggested the BOE will have to reduce rates in the coming months, probably before a general election widely expected in the autumn.
BOE officials estimate inflation, which peaked over 11%, will slide back to the 2% target in the second quarter, due to lower energy bills and then rise more gently than previously estimated later in the year. However, it warned of upside risks from "geopolitical factors."
Under market expectations for two quarter-point cuts this year and a slow decline to 3.75% in the middle of 2027, inflation drops below target at the end of the second year of the forecast and is even further below a year later - a clear sign that officials believe easing is needed, putting into play a move in either June or August.
The BOE also adjusted its guidance about how policy will develop. It kept the line that "policy could remain restrictive even if Bank Rate were to be reduced" and added that it will watch the "forthcoming data releases and how these informed the assessment that the risks from inflation persistence were receding."
Investors are anticipating a cut in August but have rapidly scaled back expectations for further easing after stronger-than-expected inflation readings both in the US and UK. Bailey in recent weeks - along with Ramsden - has pointed out that Britain's economy is tracking developments in the eurozone more than in the US, and the European Central Bank is expected to deliver a cut next month.
An early cut by the BOE could put it at odds with the US Federal Reserve, which is not expected to ease its policy until later in the year, and align it with the European Central Bank. The ECB has given a strong steer that it will cut rates in June. Sweden's Riksbank cut its rate for the first time since 2016 on Wednesday.
BOE policy is coming under increasing political scrutiny as the government hopes rate cuts will lift its standing in the polls ahead of an election.
Chancellor of the Exchequer Jeremy Hunt has repeatedly talked up the possibility of reductions, saying they would give voters a "feel-good factor" in the run-up to a UK general election widely expected in the autumn. The bank said his £10 billion tax cut in the March budget will lift the level of GDP by 0.25%.
Leaving rates unchanged under the BOE's forecasts would produce a spike in unemployment to 5.9% by the end of 2026 - a full point higher than if rates follow the market path and well above the current level of 4.3%.
On the economy, the BOE estimated that last year's shallow recession has finished and that the economy will grow 0.5% this year and 1% in 2025. That's an upgrade from its February forecast for 0.25% and 0.75%.
Officials also forecast a big improvement in living standards, with average wage growth of 5.25% this year, well above inflation. Real post-tax household income will now expand 1.75% this year, above the 2010-2019 average, though some of the upgrade was driven by higher population estimates.
The bank also said "key indicators of inflation persistence were moderating," although pay and services inflation are still too high. The MPC said there were signs that the labor market is loosening as well, with the bank saying it now no more tight than it was before the pandemic.
However, the MPC remains divided about how soon it can reduce rates. Catherine Mann, Jonathan Haskel and Megan Greene all recently signalleds their reluctance to back a quick move, citing strong wage growth and services inflation.
Source : Bloomberg
