When will interest rates be cut?
The Bank of England will announce its latest base rate decision on Thursday lunchtime – but no one is expecting a cut from the current 5.25%.
It’s widely thought rates have reached their peak – they’ve been at their highest level for 16 years since August.
But market forecasts for a June cut seem to have waned, with August or September now being priced in more heavily.
A feeling that inflation may not reach, or at least stay at, the 2% target through this year (and we’ve seen how inflation can prove stickier than expected with recent US figures) has led swap rates, which dictate how much it costs lenders to lend, to rise.
Thursday’s decision
During March’s meeting of the Bank’s Monetary Policy Committee, only one of the nine members voted for a cut.
Steve Matthews, investment director at Canada Life Asset Management, doesn’t see any movement from the majority eight this time – suggesting a cut isn’t imminent.
“Looking ahead to Thursday… Sky News says it expects an 8-1 vote in favour of no cut, with Swati Dhingra being the lone outlier.
“While there’s optimism within the Monetary Policy Committee that inflation will close in on the all-important 2% as the fuel effect falls out, the Bank of England will be deeply aware of the second-round inflation effect.
“Rather than patting itself on the back when the 2% figure is hit, it will require clear evidence that inflation is under control rather than simply hitting a target.”
High inflation is the reason rates have been elevated – squeezing people’s finances and encouraging them to save tends to bring prices down.
Inflation is expected to have dropped significantly in April due to the fall in the energy price cap, and we’ll get an announcement on this next Wednesday – but analysts fear it could rise again later this year.
Canada Life is of the view that this means we’ll have to wait until August for a base rate cut.
Others think it could be later.
Susannah Streeter, head of money and markets at Hargreaves Lansdown, said “hopes are creeping back in about a summer interest rate cut, although September is still very much a possibility”.
Some are more optimistic
Weaker employment figures in April add to the case for lower interest rates – more people looking for jobs means employers aren’t under as much pressure to raise wages, which can be inflationary.
Another factor which means the BoE could drop rates before the US is that the UK has entered recession, so the committee may want to ease restrictions on the economy.
Andrew Goodwin, chief UK economist for Oxford Economics, said data on services inflation and private sector regular pay mean there is no hope for a May cut. As to whether it will even come in June or August, it’s a “close call”.
However, the chair of HSBC has predicted the Bank will move in June.
Speaking at HSBC’s annual general meeting today, Mark Tucker said he expected the European Central Bank and Bank of England to cut rates next month, both lowering by 150 basis points (to 3.75%) by the end of 2025.
The respect Capital Economics thinks 4% is more likely – while markets are leaning towards 4.5% come the end of next year.
Previous forecasts suggested rates could fall as low as 3% next year.
What has the Bank said?
Governor Andrew Bailey has repeatedly indicated that nothing is imminent.
“Inflation has continued to fall as expected. Cost pressures have eased, and the restrictive stance of monetary policy is working to bring inflation down. But we need to be sure that inflation will return all the way to our 2% target sustainably,” he said in March.
