Bank of England expected to keep interest rates at 5.25%

The Bank of England could hint at the possibility of interest rates being cut later this year. Credit: PA Wire/PA Images

The Bank of England is expected to leave UK interest rates unchanged today, despite clear progress having been made on inflation.

How soon the central bank can begin cutting borrowing costs will be in sharp focus on Thursday, as the country balances on the cusp of a recession.

Decision-makers on the Bank’s Monetary Policy Committee (MPC) are widely expected to keep interest rates at 5.25% for the fourth time in a row.

It comes as cost of living pressures have eased sharply in recent months, despite official figures showing a surprise increase in the rate of UK inflation from 3.9% in November to 4% in December.

Experts said the MPC could use Thursday’s announcement to hint at the possibility of interest rates being cut later this year.

Inflation more than halved over the course of 2023, meeting the PM's target. Credit: PA Graphics

It would bring some relief to businesses and household borrowers who have seen costs go up steadily from lows of 0.1% at the end of 2021 to the highest rate for nearly 16 years.

UK economic growth has also stagnated amid tighter lending conditions, and official figures released in February could reveal the country dipped into a technical recession at the end of last year, which is defined as two consecutive quarters of negative growth.

Allan Monks, a UK economist for JP Morgan, said it is widely expected that rates will be kept the same on Thursday, but that the Bank will “almost certainly make a dovish pivot that puts future easing higher up on the agenda than before”.

“The Bank of England’s updated narrative is likely to be that clear progress is being made on inflation, but that it is too early to declare victory and therefore caution must be exercised when thinking about when and how quickly policy can be normalised,” he said.

Andrew Bailey, governor of the Bank of England, said a recession would likely be brief. Credit: Hannah McKay/PA

Sanjay Raja, a senior economist for Deutsche Bank, said he thinks it could be a unanimous vote on the nine-person committee to keep rates at 5.25%.

But there could be a “subtle but important shift” in the Bank’s outlook for future rate cuts, although policymakers are likely to retain their cautious stance of keeping borrowing costs higher for long enough to get inflation under control, he said.

Mr Raja also said there is likely to be a big change in the MPC’s projections for inflation returning to its 2% target, which could be achieved about 18 months earlier than previously forecast.

The MPC could begin lowering interest rates as early as May, he estimated. The Bank will publish its latest Monetary Policy Report at the same time as the rates decision, where its outlook for inflation and economic growth will be in sharp focus.

Want a quick and expert briefing on the biggest news stories? Listen to our latest podcasts to find out What You Need To Know...