Bank of England stands pat on interest rates

The Bank of England stood pat on interest rates on Thursday at 5.25%, as widely expected, but suggested cuts could be on their way.

This marked the sixth meeting in a row the Bank has held rates, even as the latest figures from the Office for National Statistics showed that consumer price inflation eased to 3.2% in March from 3.4% in February, having hit a peak of 11.1% in October 2022.

The Monetary Policy Committee voted 7-2 to keep rates unchanged, with Swati Dhingra and Dave Ramsden opting for a cut to 5%.

In March, the MPC voted 8-1 to keep rates on hold, with only Dhingra voting for a cut.

The Bank said CPI inflation is expected to return to close to its 2% target in the near term, but to rise slightly in the second half of this year, to around 2.5%, due to the unwinding of energy-related base effects. In February, it had forecast inflation would rise to around 2.75% by the end of the year.

"There continue to be upside risks to the near-term inflation outlook from geopolitical factors, although developments in the Middle East have had a limited impact on oil prices so far," it said.

Governor Andrew Bailey said: "We've had encouraging news on inflation and we think it will fall close to our 2% target in the next couple of months. We need to see more evidence that inflation will stay low before we can cut interest rates. I'm optimistic that things are moving in the right direction."

The BoE also said on Thursday that following modest weakness last year, UK GDP is expected to have grown 0.4% in the first quarter of 2024 and set to grow by 0.2% in the second.

"Despite picking up during the forecast period, demand growth is expected to remain weaker than potential supply growth throughout most of that period," it said. "A margin of economic slack is projected to emerge during 2024 and 2025 and to remain thereafter, in part reflecting the continued restrictive stance of monetary policy."

At the press conference after the rate announcement, Bailey said: "Let me be clear, a change in Bank rate in June is neither ruled out nor a fait accompli."

Paul Dales, chief UK economist at Capital Economics, said the Bank "gave the impression it’s getting closer to cutting rates".

"We think some soft inflation and wages data may be enough to prompt it to cut rates at the next meeting in June, if not at the following meeting in August. And our forecast that inflation will fall to just 1.0% later this year implies the Bank will reduce rates to 3.00% next year rather than to 3.75-4.00% as expected by investors," he said.

James Smith, developed markets economist at ING, said: "The Bank is inching towards a rate cut but it is keeping its options open. The June versus August debate will be largely resolved when we get those April inflation figures in a couple of weeks' time. For now, we’re sticking with August as our base case."