Reasons to be cheerful: Interest rate cut could be just around the corner after Bank of England positivity

Those hopes were dashed and the bank base rate remains at 5.25 per cent, where it has been for some six months now. However, the widely anticipated decision to do nothing was accompanied by some positive signals and fresh comments from the Bank of England’s governor, Andrew Bailey, which were seized upon by the markets, ramping up the chances of a rate cut as early as next month, at the June 20 meeting of the Bank’s monetary policy committee (MPC).

And in a strong signal that the tide may be turning among the rate-setters, two members of the nine-person MPC voted for interest rates to be cut by 0.25 percentage points, up from just one member in March. Bailey said there had been “encouraging news” on inflation which the Bank expects to come close to its 2 per cent target between April and June. At the last reading, it stood at 3.2 per cent having hit an October 2022 peak of 11.1 per cent.

When it comes to which of the major central banks will blink first, up until recently the smart money would have been on the US Federal Reserve. It tends to be a first mover and it was looking like it had inflation licked, but that is now proving stickier than expected. The European Central Bank could well strike first and lower borrowing costs for those in the EU.

Closer to home, the MPC will be looking to assess important upcoming data releases, including April and May’s official inflation and jobs figures, prior to June’s meeting.

Luke Bartholomew, senior economist at Scottish funds giant Abrdn, said: “No surprise in the Bank of England’s decision to keep interest rates on hold, but the composition of votes is interesting. The extra vote for a rate cut is likely to see investors increasingly speculating about the possibility of the first-rate cut happening in June as more of the committee become convinced of the need to ease policy. However, that decision will be highly data dependent.

“With the US Federal Reserve likely to [keep] rates elevated for longer than the UK (and the rest of Europe) dollar strength is likely to remain an important theme, and probably constrains how much the BoE can cut this year without putting significant downward pressure on the pound.”

There has been a growing frustration among many in the business community at the UK central bank’s inaction, particularly in light of its eagerness to hike rates month after month when inflation was proving sticky. Critics have also pointed out that those inflationary pressures were largely of a global nature, triggered by soaring energy costs, and beyond the direct control of MPC.

Roger Barker, director of policy at the Institute of Directors (IoD), described the latest rate freeze as “disappointing” as he highlighted IoD research showing that two thirds of business leaders believed that the right decision would have been to start cutting rates now.

He said: “There is a significant risk in doing nothing. Interest rate cuts will only impact the real economy with a significant time lag and, once definitive evidence of lower inflation has been gathered, it will already be too late. The Bank needs to get ahead of the curve and not repeat the mistake of 2021, where it was slow to adjust monetary policy to the prospect of rising inflation.”

Sam Martin, chief executive of Peckwater Brands, said: “The Bank of England is understandably unwilling to loosen its grip on inflation, particularly as concerns around rising food prices and wages remain. But if you want an example of just how blunt an instrument interest rates are in the fight against inflation, take a look at the hospitality sector, which finds itself battered from both sides.

“Hospitality businesses are facing higher costs across the board - labour, ingredients, taxes, energy. In turn, they are forced to pass on price increases to customers in order to stay afloat, and it is telling that food and drink businesses are now a key driver of inflation. But keeping a high base rate will not make their lives any easier.”

While the markets may have upped the likelihood of the first rate cut coming in just a few weeks time, many analysts and economists believe that easing will not take place until later in the summer. Following June 20, the next scheduled meeting for the MPC takes place on August 1.

Joe Nellis, professor of global economy at Cranfield School of Management, said: “With oil prices on the rise again there are fears that inflation could even increase for a few months, delaying an interest rate cut until August 1, at the earliest. There are some choppy waters ahead, but we still expect two cuts in interest rates by the year end, taking the base rate down to 4.75 per cent. Anyone hoping for a return to the ultra-low interest rates of the past decade any time soon will face disappointment however as borrowers continue to lose out to savers.”

Meanwhile, the central bank slightly upgraded its forecast for UK economic growth, predicting that gross domestic product (GDP) will increase 0.5 per cent this year and 1 per cent in 2025, both 0.25 percentage points higher than the last estimates published in February. The improved outlook reflects higher estimates for population growth, which will boost productivity, as well as energy costs easing.

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