London city skyline on March 6, 2024 in London, United Kingdom.
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LONDON – The Bank of England on Thursday kept interest rates as expected and said restrictive monetary policy was taming inflation, but warned that a June rate cut was not a done deal.
Members of the Central Bank's Monetary Policy Committee voted by 7 votes to 2 in favor of maintaining interest rates at their current levels, with the latter preferring to reduce them. At its previous meeting, only one member voted in favor of lowering interest rates.
The decision keeps the Bank of England's key interest rate at 5.25%.
However, the Monetary Policy Committee warned that indicators of persistent inflation “remain high,” confirming that services inflation reached 6% in March. She added that geopolitical issues add “upside risks” to the near-term price outlook.
In a new addition to its monetary policy statement, the bank said that it “will take into account upcoming data releases and how these help assess that the risks resulting from continued inflation are receding.” Two editions of the consumer price index and two sets of wage growth data are scheduled to be released before the central bank's next meeting on June 20.
Bank of England Governor Andrew Bailey said the latest figures were “encouraging, but we are not yet at a point where we can cut interest rates for banks.”
June or August?
Expectations are growing for interest rate cuts to begin in the summer, with financial markets pricing in a 25 basis point cut in August and 50 basis point cuts overall this year.
However, some economists expect a cut in June, with market prices giving a 45% probability.
UK headline inflation is expected to fall significantly in April due to lower energy prices, from 3.2% currently to below the Bank of England's target of 2%, according to some forecasts.
In its statement issued on Thursday, the Bank of England said it expects UK GDP to grow by 0.4% in the first quarter of the year, and by 0.2% in the second quarter. The economy entered a shallow recession in the second half of 2023.
Meanwhile, the bank sees headline inflation at close to 2% in the near term, and expects it to rise slightly later in the year as withdrawals from the energy market ease.
In a press conference following the announcement, Bank of England Governor Andrew Bailey stressed the importance of monitoring data releases.
He said, “June is not a fait accompli, but every meeting is a new decision.”
European variation
The dovish messages differ somewhat from those sent by the European Central Bank, where monetary policymakers have firmly directed interest rates to be cut in June, unless there is a major inflationary shock.
Meanwhile, the Swiss National Bank and Sweden's central bank have already cut interest rates, putting Europe's central banks on a faster timetable than the US Federal Reserve, which is expected to remain steady for longer. The total number of cuts from each central bank this year is still open to debate.
Bank of England Governor Bailey also told reporters on Thursday that UK inflation dynamics were “different to the US”, which had led to some disconnect between interest rate expectations. US inflation rose more than expected in March, reaching 3.5%.
Paul Dales, chief UK economist at Capital Economics, noted that the Bank of England on Thursday reiterated previous messaging about monetary policy remaining tight “for a sufficiently long period” and “for an extended period.”
This “suggests to us that the bank is not signaling that it will cut rates at its next policy meeting in June,” he said in a note.
“But the new line that the MPC will ‘consider upcoming data releases and how these report inform the assessment that risks from persistent inflation are easing’ suggests that the MPC is prepared to change its stance and that the data will determine when that happens.”
He added that the wage data may end up determining whether the cut will go down in June or August.
