City of London skyline on 6th March 2024 in London, United Kingdom.
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LONDON — The Bank of England on Thursday announced a widely-expected hold on interest rates as it said restrictive monetary policy was taming inflation, but warned a June rate cut was not a done deal.
Members of the central bank’s Monetary Policy Committee voted 7-2 to hold, with the latter favoring a cut. In the prior meeting only one member voted for a cut.
The MPC nonetheless cautioned that indicators of inflation persistence “remain elevated,” highlighting that services inflation came in at 6% in March, and that there are “upside risks” to the near-term outlook from geopolitics.
It said it would monitor upcoming data releases closely. Two consumer price index prints are due before its next meeting on June 20.
The decision keeps the BOE’s key Bank Rate at 5.25%.
“We need to see more evidence that inflation will stay low before we can cut interest rates,” BOE Governor Andrew Bailey said in a statement reported by Reuters.
“I’m optimistic that things are moving in the right direction.”
June or August?
Market anticipation has been building for interest rate cuts to begin in the summer, with money markets fully pricing in a 25 basis point reduction in August and 50 basis points overall this year.
Some economists see a cut in June and three or more cuts in 2024, though market pricing suggested a 45% probability of that following the meeting.
U.K. headline inflation is forecast to drop dramatically in April due to lower energy prices, from the current 3.2% to below the BOE’s 2% target, according to some projections.
In its Thursday release, the BOE said it expected it expected the U.K. gross domestic product to grow by 0.4% in the first quarter of the year, and by 0.2% in the second quarter. The economy fell into a shallow recession in the second half of 2023.
It meanwhile sees headline inflation close to 2% in the near-term, and expects it to increase slightly later in the year as the drag from the energy market wanes.
In a press conference following the announcement, Bailey emphasized the message in its statement that the MPC “will consider forthcoming data releases and how these inform the assessment that the risks from inflation persistence are receding.”
“June is not a fait accompli, but each meeting is a new decision,” he said.
Paul Dales, chief U.K. economist at Capital Economists, noted the BOE had repeated previous messaging on monetary policy remaining restrictive for “sufficiently long” and for “an extended period.”
This “suggests to us that the Bank is not implying it will cut rates at the next policy meeting in June,” he said in a note.
“But the new line that the MPC will ‘consider forthcoming data releases and how these inform the assessment that the risks from inflation persistence are receding’ implies that the MPC is willing to change its stance and that the data will determine when that happens.”
Wage data may end up informing whether the cut falls in June or August, he added.