Bank of England holds rate at 16-year high, signals looming cut
LONDON
The Bank of England on Thursday kept its main interest rate at a 16-year high, but hinted at a cut over the summer as U.K. inflation cools further and the country looks set to exit recession.
"We need to see more evidence that inflation will stay low before we can cut interest rates," BoE governor Andrew Bailey said after the central bank left borrowing costs at 5.25 percent, the highest level since 2008.
Signalling that a rate cut was on the horizon, two members of the bank's nine-strong Monetary Policy Committee (MPC) voted at the May meeting for interest rates to be cut by 0.25 percentage points.
The BoE maintained borrowing costs for a sixth meeting in a row, mirroring a wait-and-see approach by the US Federal Reserve and European Central Bank (ECB).
Thursday's decision came on the eve of official data expected to show that the U.K. economy has exited a mild recession ahead of a general election due this year.
The BoE on Thursday voiced confidence that the U.K. economy had grown in the first quarter, which would signal the end of a short-lived recession.
Rate cut looms
"The bank is still on track for summer easing," Yael Selfin, chief economist at KPMG U.K., said following the rate decision.
"The MPC confirmed its more dovish stance by emphasising confidence about inflationary pressure easing broadly as expected, although the 7-2 vote split suggests uncertainty around inflation persistence," she added.
U.K. annual inflation fell less than expected in March — the last official reading — to 3.2 percent.
This is well down compared with late 2022, when the rate reached a four-decade high above 11 percent as energy and food prices soared following Russia's invasion of Ukraine.
However, the U.K. inflation rate remains above the Bank of England's two-percent target, prolonging a cost-of-living crisis.
"We've had encouraging news on inflation and we think it will fall close to our two-percent target in the next couple of months," Bailey said Thursday.
"I'm optimistic that things are moving in the right direction."
Pound drops, U.K. shares hit record
The pound dropped against the dollar and euro following Thursday's decision, and with a rate cut in sight.
By contrast, London's benchmark FTSE 100 index hit a fresh record high, as did Frankfurt, with markets forecasting rate reductions in the coming months also from the ECB and the Fed.
Despite the upbeat sentiment, a leading international organisation last week said that the U.K. would expand by only 0.4 percent this year because of the inflation situation and stubbornly-high interest rates.
The Organisation for Economic Cooperation and Development (OECD) projected also that the U.K. would perform worst among the Group of Seven major economies next year.
Britain may have new leadership by then, with polls widely indicating that the main opposition Labour party is on course to win an upcoming general election after 14 years of rule by the Conservatives, currently led by Prime Minister Rishi Sunak.
But the Tories could get a boost if data due out Friday shows, as expected, Britain's economy has exited its brief recession.
The BoE hiked borrowing costs 14 times between late 2021 — when they stood at a record-low 0.1 percent — and the second half of last year, with supply-chain disruptions following Covid lockdowns also proving inflationary.
High interest rates boost savers but hurt borrowers including businesses. British retail banks meanwhile tend to mirror action by the BoE, resulting in big jumps to mortgage rates.