Bank of England approaches summer rate cut with ‘confidence’

  • By Michael Race
  • Business Correspondent, BBC News

image source, Good pictures

The Bank of England boss has said he needs to “see more evidence” that inflation has eased further before cutting interest rates.

Andrew Bailey said “things are moving in the right direction” as rates stood at 5.25%.

He said the bank expects inflation, which measures rate hikes, to fall “closer” to its target level in the next two months.

This would pave the way for an interest rate cut in early June.

But Mr Bailey warned that a cut was “not a fair thing, it’s not a done deal”.

August or September appears to be the most likely time if inflation eases as expected.

The bank fixed interest rate dictates the rates set by high street banks and moneylenders. Rates are currently at their highest level in 16 years, meaning people are paying more to borrow money for things like mortgages and loans, but savers are also getting better returns.

Mr Bailey said there was “encouraging news” on inflation, currently at 3.2%, but said the Bank needed “more evidence” before it could cut rates, which would be lower.

However, at a news conference following the bank’s decision, Mr Bailey said the bank would “need to cut rates in the coming quarters” and more than financial markets are currently predicting.

The nine-member monetary policy committee appeared to be edging closer to a cut between two rate cuts and seven remaining votes to vote on rates.

  • Inflation is forecast to ease to the Bank’s target of 2% in the coming months and to 1.9% in 2026.
  • Economic growth is 0.4% in the first three months of 2024 and 0.2% in April to June.

Chancellor Jeremy Hunt said policymakers would “wait until they are absolutely sure! Inflation is falling”. “They will then have to make a decision to reverse at some point”.

But he said it was encouraging to see “real confidence” from Mr Bailey for the first time.

But Darren Jones, the shadow chief secretary to the Treasury, said that while it was the Bank of England’s “independent right” to set interest rates, it was “bad news for people at home to have to reset their mortgages at higher rates”. rate and people have to pay rent for their houses”.

The health of the UK economy is in the spotlight as economic policies will be a key battleground in the quest for votes in the upcoming election, expected before the end of the year.

Asked on Thursday if the economy had turned a corner, Mr Bailey said: “All the evidence we’re seeing is that we’ve turned a corner from that.” But he warned it was not a “strong recovery”.

‘Waiting for rates to come down is scary’

Paul Day, 62, from Felixstowe, says his mortgage will rise to £225 a month when his five-year fixed contract expires at the end of May.

“It’s been a very scary three months for interest rates to come down, and I’m getting closer to my deadline, which is May 31st, and they haven’t,” he says.

He chooses to go to a variable rate because he doesn’t want to be “stuck” on another fixed one.

“I think things will improve within the next six months. So it’s a gamble,” he says.

Following the bank’s latest comments, financial markets now expect rates to be cut to 5% by August and then to 4.75% in November or December. Further rate cuts are forecast for 2025.

The bank began raising rates in December 2021 and has kept interest rates at 5.25% since last summer in an attempt to slow the pace at which consumer prices are rising – and to lower the cost of living.

As the Covid-related restrictions were lifted, prices began to rise rapidly as demand for the commodity increased. Energy and food prices rose following Russia’s invasion of Ukraine, and inflation rose to more than 11% in October 2022 – the highest rate in 40 years.

Electricity and tariffs have since declined, but are not expected to drop further.

By making borrowing more expensive, the bank hopes to encourage people to reduce spending, which leads to lower demand for goods and less inflation.

But it’s a balancing act because high interest rates can harm the economy and limit growth because businesses hold back on investing in production and jobs.

The bank said it expects the economy to perform slightly better this year, due to some measures in the government’s spring budget, such as population growth and cuts to national insurance.

What to do if you can’t repay the loan

  • Take responsibility. Citizens Advice recommends finding out how much you owe, to whom, which debts are most urgent and how much you should pay each month.
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