Interest rate held for sixth consecutive month – but edges closer to cut soon

UK

The Bank of England has edged closer to a cut in interest rates, with another member of its nine-person Monetary Policy Committee (MPC) voting for lower borrowing costs this month.

While the MPC voted 7-2 to leave UK interest rates on hold at 5.25%, the change in the vote will be seen as a further sign that they could be coming down soon – perhaps as soon as next month.

Money latest: Reaction to interest rates announcement

Forecasts

Alongside its rate decision, the Bank published new forecasts for the UK economy, which show that gross domestic product (GDP) is projected to be stronger this year and unemployment and inflation rates lower than previously expected.

It said that the CPI rate of inflation was likely to drop to its 2% target imminently – though it would bounce a little higher afterwards.

‘Optimistic things are moving in the right direction’

More on Bank Of England

Governor Andrew Bailey said: “We’ve had encouraging news on inflation and we think it will fall close to our 2% target in the next couple of months. We need to see more evidence that inflation will stay low before we can cut interest rates.

“I’m optimistic that things are moving in the right direction.”

The documents released today are likely to reinforce the view among economists that even though the US central bank, the Federal Reserve, has hinted it won’t cut interest rates anytime soon, the Bank is likely to cut them this summer.

The main debate among investors is when that cut will happen: as of this morning they were betting the first quarter percentage point cut would come in August, though some think it could be as soon as next month.

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Higher interest rates – who was to blame?

Those who try to construe likely future decisions based on the voting patterns on the committee will see significance in the fact that Dave Ramsden, one of the Bank’s deputy governors, has joined Swati Dhingra in voting for lower interest rates.

Often the change in the vote of a senior internal MPC member – as opposed to one of the four external MPC members (of which Ms Dhingra is one) – signifies that the rest of the committee may soon follow suit.

The critical line from the minutes of today’s decision reads that the MPC “would consider forthcoming data releases and how these informed the assessment that the risks from inflation persistence were receding.”

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