Bank of England Leaves Interest Rates Unchanged, Signals It’s Closer to Cutting
LONDON—The Bank of England kept its key interest rate unchanged at a 16-year high, but indicated that it is on course to cut rates over the coming months alongside its European peers.
The U.K.’s central bank on Thursday left its key rate at 5.25% for the sixth straight meeting of its policymakers, in line with what investors and economists had been expecting. But in a fresh sign that a move is getting closer, two of the nine members of its Monetary Policy Committee voted to lower the key rate to 5%.
They will next meet in June, and then again in August. A cut at either meeting would likely see the BOE move before the Federal Reserve, which is now facing the prospect of keeping rates higher for longer. Cutting before the Fed would risk weakening the pound sterling against the U.S. dollar and pushing prices of imported goods and services higher. But waiting too long could delay an economic recovery and lead to job losses.
“We need to see more evidence that inflation will stay low before we can cut interest rates,” BOE Gov. Andrew Bailey said. “I’m optimistic that things are moving in the right direction.”
Inflation in the U.K. has fallen steadily over recent months, and the BOE said it likely hit its 2% target in April, though official figures won’t be released until May 22. By contrast, inflation readings from the U.S. have been hotter than expected for a number of months, prompting the Fed to adopt a wait-and-see approach to future policy decisions.
The BOE expects inflation to pick up again toward the end of this year as energy prices stabilize, and fall again in the second half of 2025.
The BOE’s policymakers forecast that inflation will be just below their 2% target in mid-2026 even if they cut interest rates at the pace expected by investors. That indicates that the central bank is comfortable with the trajectory for its key rate expected by investors, who see August as the most likely month for a first move, with two further cuts by mid-2025 and additional moves to 3.75% by the second quarter of 2027.
In Europe, the central banks of Switzerland and Sweden have already lowered their key interest rates for the first time since the inflation surge began in 2021, while the European Central Bank has strongly indicated that it will cut in early June.
The likely divergence in policy settings reflects differing economic fortunes. While the U.S. economy has grown rapidly over the last 18 months, the U.K. and much of the rest of Europe stalled following the surge in energy and food prices triggered by Russia’s invasion of Ukraine.
There are signs that the U.K. is starting to recover from that shock. Economic output fell in the final six months of last year, but the BOE estimates it rose again in the first three months of 2024 and will do so again in the current quarter.
The central bank raised its forecast for growth this year to 0.5% from 0.25%, and its forecast for next year to 1% from 0.75%. It attributed the stronger outlook to higher-than-expected population growth.
Policymakers are increasingly confident that growth can pick up without pushing inflation above their target. They have worried that wages would continue to rise rapidly in a tight jobs market, preventing a cooling in the pace of price rises for labor-intensive services.
But policymakers said there are signs those sources of inflation are cooling, and that they will closely watch coming inflation and jobs releases for signs of further easing as they judge when to make their first cut.
Write to Paul Hannon at [email protected] and Will Horner at [email protected]