Andrew Bailey, governor of the Bank of England, said inflation was “moving in the right direction” as policymakers voted to leave interest rates on hold for the fifth consecutive meeting.
The decision means the Bank Rate remains at a post-financial crisis high of 5.25 per cent, a level reached last August.
While the decision was widely expected, the Monetary Policy Committee’s (MPC) two hawkish outliers – Catherine Mann and Jonathan Haskell – backed a hold rather than a hike.
Swati Dhingra was the only member of the MPC to back a 25 basis point cut.
This meant eight members voted for a hold and one for a cut, making it the first meeting since September 2021 in which no members voted for a hike.
The shifting voting pattern suggests that the Bank is edging ever nearer to cutting interest rates.
“We’re not yet at the point where we can cut interest rates,”Andrew Bailey, governor of the Bank, said. “But things are moving in the right direction”.
The Bank was forced into aggressively hiking interest rates over 2022 and 2023 as it sought to quell a sudden burst in inflation which was fuelled by the Russian invasion of Ukraine. Inflation peaked at over 11 per cent back in October 2022.
Since then, price pressures have abated fairly rapidly. Figures out yesterday showed that inflation fell to 3.4 per cent in February, a slightly larger fall than expected by most economists.
Forecasts from the Bank show that inflation will fall to two per cent in the Spring, although it may then rise again to around three per cent by the end of the year.
With inflation falling fast, traders have turned their attention to when the Bank will start lowering interest rates. So far, policymakers at the Bank have taken a cautious approach, pointing to signs that cost pressures remain high.
Services inflation, which is arguably a more important figure than the headline rate of inflation, remains above six per cent. Annual pay growth meanwhile stands at 5.6 per cent.
Although both are firmly on a downward trajectory, the MPC continued to express concerns that “key indicators of inflation persistence remain elevated”.
The minutes showed that some members who backed a hold were concerned that “wage growth remained too high” while there were only “limited signs” that service inflation would return to target “sufficiently rapidly”.
“A further accumulation of evidence on inflation persistence would be required to warrant a shift in the monetary policy stance,” the minutes said, although there was disagreement about the extent of evidence that would be needed.
Before the meeting, markets thought the Bank would start cutting rates in the summer, with June the earliest likely start date. A May rate cut may now be on the cards.
Markest expect three cuts in the year bringing the Bank Rate to 4.5 per cent.
The Bank acknowledged that monetary policy “could remain restrictive even if Bank Rate were to be reduced”.
The decision follows the Fed’s latest interest rate announcement last night. Like the Bank, the US central bank held interest rates for a fifth consecutive meeting.
However, the latest ‘Dot Plot’ charts showed that Fed officials still expect three rate cuts in 2024 even after inflation has come in higher than expected. Markets read the forecasts as a sign that summer cuts are the base case.