The BoE leaves rates unchanged, but a rate cut seems just around the corner

As expected, the Bank of England kept its interest rates unchanged today, with six out of nine members of the Monetary Policy Committee voting to keep rates at 5.25%. However, Governor Andrew Bailey welcomed "good news" on the inflation front.

As a result of the BoE decision, Britain's 2-year and 10-year gilt yields rose, while the pound declined. "The fact that two members are still voting for higher rates suggests that there is no material, immediate momentum to lower rates and the inflation projections implicitly show that the committee as a whole believes that the speed of rate cuts implied by yield curve has been too rapid, " Philip Shaw, chief economist at Investec, told Reuters. "We stand by our baseline call that the committee will begin to ease in June”.

Governor Andrew Bailey held a press conference at 12:30 pm, noting there was good news on inflation over the past few months, and that it has “fallen a long way”, from 10% a year ago to 4%. But he added that the BoE still needs to see more evidence that inflation is set to fall all the way to the 2% target, and stay there, before it can lower interest rates.

Source: Berenberg

But economists believe that a rate cut is just a few weeks away. Thanks to lower energy prices, inflation is expected to come to down to the 2% target in the spring. Economists polled by Reuters forecast rates to be cut in the second quarter of this year. This would give a welcome boost to the British economy, which has been struggling in recent months. The latest data shows the economy is slowly walking into a mild recession. On Tuesday the International Monetary Fund said it expects the UK's economy to just grow 0.6% this year.

Goldman Sachs says it continues “to expect the first 25bps cut in May, followed by 25 bps cuts every meeting until Bank Rate reaches 3.0% in May 2025. An earlier cut in March cannot be ruled out entirely, especially if the disinflation process is coupled with further deterioration in growth."

Meanwhile, the Institute for Economic Affairs (IEA) thinktank just issued a statement calling for lower rates to ward off the risk of stagflation. “ We fear that rates remaining at this historic high will damage the UK economy and recommends lowering them from 5.25 percent to five percent”. It added that “the latest data suggests that the economy likely avoided recession in the last quarter of 2023, but only just. At best, the UK economy grew by around half a per cent in 2023. This pace of growth offers no threat to inflation."