- The Bank of England is close to cutting interest rates from their highest level in 16 years, after a second member of the Monetary Policy Committee voted in favor of lowering borrowing costs, and the bank’s governor, Andrew Bailey, said he was “optimistic that things are moving in the right direction.”
- According to Bloomberg, the bank’s deputy governor, Dave Ramsden, joined external member Swati Dhingra in calling for an immediate reduction of the base interest rate from its current level of 5.25%, after maintaining it for the sixth meeting in a row, while the other seven members of the Monetary Policy Committee preferred to maintain the current rate. , saying they need more evidence that inflation will be curbed.
- Bailey said, in the press conference held after the announcement of the decision to fix interest rates last Thursday evening, that it is likely that the interest rate will be reduced in the coming months, and that a change as soon as next June “is not unlikely, nor is it a reality,” and “it is possible that we will We will need to lower interest rates in the coming quarters, and ease monetary policy to some extent during the expected period, and it may be greater than what the markets are currently taking into account.”
- Government bonds rose, and the pound sterling fell after the decision, and traders took into account a 50% probability that the first cut of 25 basis points will take place during the next month, while a 100% expectation is that the cut will take place by August.
- Markets now expect a total rate cut of 58 basis points during the current year, compared to 54 basis points previously expected.
- Michael Brown, a strategist at Pepperstone Group in London, said: “A change in the view of a member of the central bank is rare, and this should be taken as a strong signal that the Bank of England is ready to cut interest rates, and this represents a more pro-cut shift on the part of the Bank.” “The Monetary Policy Committee, which increases the likelihood that the first interest rate cut will actually be implemented at the next meeting scheduled in June.”
- The bank is currently keeping its benchmark lending rate at its current level in an area it described as restrictive, with the aim of alleviating wage and price pressures that reached their highest level in four decades in late 2022. Forecasts issued with the decision indicate that the Bank of England will have to cut... Interest rates in the coming months, perhaps before the widely expected general election during the fall.
- “We have received encouraging news on inflation, and we believe it will soon fall to our target of 2% in the next two months,” Bailey said in a statement on Thursday. “We need to see more evidence that inflation will remain low before we can lower interest rates.” “I am optimistic that things are moving in the right direction.”
- The Bank of England's policy faces increasing political scrutiny as the government hopes interest rate cuts will boost its popularity in opinion polls ahead of the election.
- Treasury Secretary Jeremy Hunt has repeatedly spoken about the possibility of cuts, saying they would give voters a “feel-good factor” in the run-up to the UK general election widely expected in the autumn.
- Bank of England officials estimate that inflation, which peaked at more than 11%, will fall again to the 2% target in the second quarter, due to lower energy costs, and then rise more quietly than previously expected later this year, however. He warned of the upside risks resulting from “geopolitical factors.”
- With market expectations of a quarter-point rate cut twice this year, and a slow decline to 3.75% in mid-2027, inflation falls below target at the end of the second year of forecasts, and even remains lower a year later, a clear sign that officials see... There is a need for facilitation, which supports taking a step in next June or August.
- The bank said in the minutes of the meeting: “Tightening monetary policy affects real economic activity.” The Bank of England also modified its guidance on ways to develop monetary policy, as it maintained the approach that “policy can remain restrictive even if the bank interest rate is reduced,” adding that it will monitor “upcoming data releases, and the impact of this in assessing that the risks resulting from the continuation of... Inflation is subsiding.”
- The comments will lead to increased market scrutiny of the two sets of inflation and wages data set to be released before the bank's next meeting on June 20.
- Some economists said inflation may fall below the 2% target during that period, increasing pressure on the bank to take action.
- Investors expected a rate cut next August, but they quickly lowered their expectations for further easing after stronger-than-expected inflation readings in both the United States and the United Kingdom.
- In recent weeks, Bailey - along with Ramsden - noted that the British economy follows developments in the euro zone more than the United States, and the European Central Bank is expected to cut interest rates next month.
- “June is definitely dynamic, but there is no specific prior commitment to monetary policy measures at the meeting,” said Kerstin Kondby Nielsen, foreign exchange and interest rate strategist at Danske Bank in Copenhagen, adding that this led to a reaction. “Somewhat tepid” in the market.
- An early cut by the Bank of England could put it in a conflicting position with the US Federal Reserve, which is not expected to ease its monetary policy until later in the year. While the Bank of England’s position is consistent with the European Central Bank, the “European Central Bank” has given guidance. Strong that it will cut interest rates in June, the Riksbank cut interest rates for the first time since 2016 last Wednesday.
- Keeping interest rates in line with the Bank of England's forecast would see unemployment rise significantly to 5.9% by the end of 2026, a point higher than if rates followed the market's path, and well above the current level of 4.3%.
- Regarding the economy, the Bank of England estimates that last year's shallow recession is over, and that the economy will grow 0.5% this year, and 1% in 2025. These estimates are up from the central bank's February forecast of 0.25% and 0.75% respectively.
- Officials also expect a significant improvement in living standards, with average wages growing by 5.25% this year, well above inflation.
- Real household income after tax is now expected to increase by 1.75% this year, higher than the 2010-2019 average, although some of the increase was driven by rising population estimates.
- The bank also said that “key indicators of continued inflation were moderate,” although wage and service inflation remained very high.
- The Monetary Policy Committee indicated that there are signs that the labor market is also calming, with the bank saying that the situation is now no more tight than it was before the pandemic.
- However, the Monetary Policy Committee remains divided on the timing of interest rate cuts. Katherine Mann, Jonathan Haskell, and Megan Greene have all recently indicated they are abandoning support for rapid cuts, citing strong wage growth and services inflation.
- Yael Selvin, chief economist at KPMG in the UK, said: “The first interest rate cut could take place as soon as next month, allowing the Monetary Policy Committee to assess the decline in inflation in April, and the impact of the living wage increase.” “We do not rule out a delay until the second half of the year, while the overall scope of the easing will be particularly sensitive to developments in costs and prices.”
