Bank keeps interest rates at 5.25% but 'optimistic' about summer cuts

The Bank of England has decided to hold UK interest rates at 5.25%, but gave a sense of optimism that borrowing costs could soon be cut, ITV News Economics Editor Joel Hills has more

It’s a hold. But one that leaves the door open for an interest rate cut in June.

The headline rate of inflation fell to 3.2% in March and the Bank of England thinks it is set to fall further, reaching touching distance of its 2% target “within the next couple of months”.

Seven members of the Monetary Policy Committee (MPC) voted to keep the rate at 5.25%. Two of them voted for a cut.

The balance of opinions has shifted slightly since March with Dave Ramsden joining Swati Dhingra in feeling it’s time to ease off.

Food and fuel inflation - both significant drivers of soaring overall inflation in the UK - are now coming down again.

The fall in the OFGEM price cap in April is bringing bills down but the Bank assumes the cap is unlikely to fall further.

Governor of the Bank of England Andrew Bailey told ITV News he was optimistic about the current picture, but can't guarantee when - or how quickly - interest rates can come down.

Consumer prices are beginning to stabilise, albeit at a much higher level than three years ago, and the outlook for economic growth 90.5% this year and 1% in 2025) looks weak but the MPC wants to see more compelling proof that inflation has been tamed before it cuts.

The Bank believes the inflationary full impact of the both the pandemic and Russia’s invasion of Ukraine has now been felt.

What remains is a lingering concern that inflation is feeding itself domestically.

The Bank worries about the tightness of the Labour Market, although it concede that the ratio of vacancies to jobseekers in the UK has fallen back to pre-Covid levels.

It also worries about annual pay growth and inflation in the Services sector of the economy, both of which are running above 6% a year.

“We need to see more evidence that inflation will stay low before we can cut interest rates,” explains the Governor, Andrew Bailey. “I’m optimistic that things are moving in the right direction”.

Anyone with a mortgage will be wishing things would move a little more quickly.

The next interest rate decision will be announced on June 20.

Before that, the Bank will have access to pay and price data for April and May.

The MPC will be looking for evidence that both behaving as expected. If they get it then the Bank is signalling it may lower the cost of borrowing.

Anyone hoping for a nod that interest rates cuts are imminent or clues as to how quickly rates are likely to fall and where they might settle is likely to be disappointed by what the Bank has to say.

The MPC is keeping its options open and promising only to follow the data.

Bank Rate remains at 5.25%. Andrew Bailey has said previously that one cut would leave rates in “restrictive” territory? What about two or three? At what level do interest rate cease to be restrictive? The Bank won’t say.

On the face of it, there’s plenty of room for the bank to ease off the accelerator but we still don’t know what “neutral” looks like.

But let’s take the wins. The Bank believes the recession is over and the disposable incomes will continue to improve.

The future looks brighter than it did.

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