Bank of England not yet ready to cut interest rates, say economists

Those waiting for the Bank of England to reduce borrowing costs may face an extended period of pressure

UK borrowers might need to wait longer for a cut in interest rates, as experts suggest the Bank of England isn’t ready to make a reduction just yet.

The bank’s Monetary Policy Committee (MPC), responsible for setting UK interest rates, is expected to maintain the current 5.25% rate at its upcoming Thursday announcement. This rate has been steady since August last year.

Those waiting for borrowing costs to drop may face an extended period of pressure. In the March MPC meeting, only Swati Dhingra voted for a reduction of 0.25 percentage points, while the other eight members opted for no change.

Investec’s chief economist Philip Shaw said, “This broad direction illustrates that collectively the committee is moving gradually towards a rate cut.” However, he believes it’s unlikely they’ll take action this time around, expecting the Bank rate to stay at 5.25% for the sixth consecutive meeting.

Mr Shaw also mentioned the possibility of another MPC member joining the “easing camp” and voting for a rate decrease on Thursday. Interest rates serve as a mechanism to control UK inflation, which has seen a significant drop from the high levels experienced in 2022 amid soaring energy costs and the peak of the cost-of-living crisis.

The latest official figures reveal that the rate of Consumer Prices Index (CPI) inflation dropped to 3.2% in March. However, experts have indicated that two key economic indicators for the Bank of England pay growth and services sector inflation have remained more stubborn.

Last month saw average wages continue to rise faster than the rate of inflation. Andrew Goodwin, chief UK economist for Oxford Economics, stated: “The data published in mid-April for services inflation and private sector regular pay growth has likely extinguished any remaining hopes of a move in May.”

He added that “Though both measures have continued to fall, progress has been slightly slower than the MPC anticipated, and they are currently running marginally higher than the forecasts published in February’s Monetary Policy Report.” Mr Goodwin suggested it will be a “close call” on whether the MPC decides to cut rates in June or August.

Mr Shaw from Investec anticipates CPI inflation to have fallen to the target 2% level in May, which would prompt the MPC to cut interest rates to 5% when they next meet in June. Economists at HSBC also predict the first rate cut to come in June.

The Bank of England is set to provide further insight into its predictions for the economy and the path of interest rates when it publishes the latest Monetary Policy Report alongside the rates decision on Thursday. Meanwhile, the US central bank, the Federal Reserve, announced on Wednesday that it’s maintaining its key interest rate unchanged, citing a “lack of further progress” in reducing inflation.

This could signal that rates might remain elevated for an extended period until there is more concrete evidence of price increases slowing down, hinted its chairman Jerome Powell.