Bank of England hawks drop push for hikes as rates stay at 5.25%

The minutes said that the MPC recognized that policy could remain restrictive even if rates were cut given they are already in restrictive territory.

Swati Dhingra voted for a second meeting in a row for a quarter-point cut, the bank’s sole voice for loosening policy now. The rest of the committee, including Bailey, supported leaving rates unchanged.

The meeting continued the narrative shift by the BOE as it adjusts to the sharp decline in inflation in recent months, with economists predicting that the Consumer Prices Index could soon fall below the bank’s 2% target. Policymakers led by Bailey have repeatedly stated concerns that underlying price pressures, including wages, could push inflation back up if the bank cuts rates too soon.

Markets are fully pricing in the first BOE rate cut for August but believe there is over a 50% chance of a move in June. After the latest rise in rate cut bets spurred by the Fed, investors expect the BOE to reduce borrowing costs three times in 2024.

A reduction in interest rates easing the pressure on household finances may provide the Prime Minister Rishi Sunak’s Conservative government a rare tailwind ahead of a general election expected later this year. The Conservative party’s plunge in the polls has coincided with a period of economic instability with households squeezed by the cost of living crisis and soaring mortgage rates after 14 back-to-back BOE hikes.

“We’re not yet at the point where we can cut interest rates, but things are moving in the right direction,” said Bailey in a statement released alongside the decision. “In recent weeks we’ve seen further encouraging signs that inflation is coming down. We’ve held rates again today at 5.25% because we need to be sure that inflation will fall back to our 2% target and stay there.”

Investors increased bets on rate cuts in the UK before the meeting after the US Federal Reserve signaled on Wednesday that it is still on track for three reductions to borrowing costs this year despite a recent tick up in inflation. It was then followed by a surprise rate cut at the Swiss National Bank on Thursday morning.

The BOE decision comes after growing evidence of the labor market loosening and price pressures cooling in recent weeks. Data on Wednesday showed inflation stepping down to a 2 1/2 year low of 3.4% in February, with services inflation cooling to 6.1% in line with the BOE’s forecasts. Last week jobs data also showed unemployment rising for the first time since last summer and wage growth edging lower.

Since the BOE’s last meeting, official data has shown the UK suffered a shallow technical recession in the second half of 2023.

Bailey has played down its significance after a pick-up in activity at the start of 2024, though the BOE expects another tepid year of growth. The minutes said the BOE continues to expect a 0.1% rise in GDP in the first quarter of 2024 and another small rise in output in the second quarter.

Chancellor of the Exchequer Jeremy Hunt said in formal exchange of letters with Bailey after the meeting that the policymakers should remain firm. “The plan is working to bring inflation down, but we must not be complacent,” Hunt said.