Bank of England leaves interest rates unchanged at 5.25%
The Bank of England has left interest rates unchanged at a 16-year high of 5.25% for the fifth time in a row.
For the first time since September 2021, no member of the Bank of England’s Monetary Policy Committee voted for a rate rise.
Jonathan Haskel and Catherine Mann both voted to hold the rate, having been the last members to keep pushing for a rate rise to 5.5%.
Swati Dhingra voted for a cut, leaving the MPC in a three-way split for the first time since the global financial crisis in 2008.
Bank of England governor Andrew Bailey said: "In recent weeks we’ve seen further encouraging signs that inflation is coming down.
"We’ve held rates again today at 5.25% because we need to be sure that inflation will fall back to our 2% target and stay there.We’re not yet at the point where we can cut interest rates, but things are moving in the right direction."
The BoE has been trying to bring down inflation to its 2% target without harming the economy but high interest rates have raised borrowing costs for mortgage holders who are paying more each month to the bank.
Inflation slowed to 3.4% in February, down from January’s 4%, the lowest since September 2021, according to figures from the Office for National Statistics (ONS).
Threadneedle Street has cut its inflation forecast, and now believes it will fall below its 2% target this spring.
"CPI inflation is projected to fall to slightly below the 2% target in 2024 Q2, marginally weaker than previously expected owing to the freeze in fuel duty announced in the Budget," according to the minutes.
The Bank of England hinted that it could bring down rates soon as it said in its minutes that a cut in borrowing costs would not necessarily mean policy was no longer restrictive.
"The Committee had judged since last autumn that monetary policy needed to be restrictive for an extended period of time until the risk of inflation becoming embedded above the 2% target dissipated," the BoE said.
"The Committee recognised that the stance of monetary policy could remain restrictive even if Bank Rate were to be reduced, given that it was starting from an already restrictive level."
Market analysts argue that with consistent falls in the growth rate of inflation, the MPC is running out of reasons not to cut rates.
Neil Birrell, chief investment officer at Premier Miton, said: “The UK base rate remains at 5.25% for now, but with the Bank of England remaining positive that inflation will be back to target sooner rather than later, there may be more room for optimism on rate cuts than they are currently suggesting.
"Clearly the Bank won’t commit to cuts until the data allows it, however investors may well start looking beyond that now.”
Read more: When will interest rates fall and what should you do?
Traders widely expect the first rate cut to take place in the summer, either in June or August.
Ellie Henderson, an analyst at Investec, said: "The direction of travel for UK inflation is certainly encouraging and supports the case for a policy easing in the near future.
"Our base case is for a first interest rate reduction in June.”
Paul Dales, chief UK economist at Capital Economics, also believes that the BoE will make its first rate cut in June.
"From April, CPI inflation in the UK will be comfortably below inflation in the US and euro-zone,” he said.
"That may prompt the Bank of England to starting cutting interest rates in the summer (perhaps in June) and inflation of 1% may force it to reduce rates to 3% next year rather than to 4% as expected by investors,” he added.
Nomura bank is a bit more cautious amid higher services inflation, aiming for August.
“The stronger services [inflation] print in particular provides some comfort for our view that the Bank will only cut rates from August this year, while weaker pay settlements raise the risk of an earlier move relative to our forecast,” George Buckley, economist at Nomura, said.
Alice Haine, personal finance analyst at Bestinvest, said that prospective homeowners might want to wait for interest rates to come down before jumping on the housing ladder.
“Hints that interest rate cuts are coming down the line may hopefully spur lenders into rolling out more attractive mortgage offers once again – something that would benefit first-time buyers and those looking to refinance alike. While those emerging from cheap deals taken out before the BoE began its rate-hiking programme may be stung with higher repayments, at least the pain won’t be quite as bad as it could have been if their product had expired last summer," she said.
“Those signing up for a fresh deal would be wise to consult a mortgage broker to help them secure the best offer possible. Remember, buyers can lock in a deal up to six months before they need it to start and can then update their rate as many times – provided better options come online - as they need to before the product term begins.
Threadneedle Street has followed other major central banks in holding off on cutting interest rates.
The US Federal Reserve has indicated that it expects to deliver three interest rate cuts later this year in a survey of its policymakers.
Fed chair Jerome Powell said he noticed the last two months' worse-than-expected reports, but they “haven’t really changed the overall story, which is that of inflation moving down gradually on a sometimes bumpy road towards 2%. That story hasn't changed.”
Read more: UK inflation dips ahead of Bank of England interest rate call
Christine Lagarde has said the European Central Bank will be unable to commit to a particular path of interest rate cuts once it starts to ease monetary policy.
This means that that even if the ECCB starts to cut borrowing costs in June as many investors expect after inflation fell sharply over the past year, it is likely to keep markets guessing on the timing and scale of potential rate cuts.
Switzerland’s surprised markets this Thursday as it announced its decision to cut borrowing costs. The Swiss National Bank said it is lowering its policy rate by 0.25 percentage points to 1.5%, from 1.75%.
It makes the SNB the first major central bank to cut interest rates in the current cycle.
Interest rates have remained unchanged in Norway, as expected, but policymakers said borrowing costs could be reduced “earlier than envisaged”.
Norges Bank left its benchmark rate at 4.5% but said it thinks it will be “gradually moving down” by the autumn.
The head of the International Monetary Fund (IMF) has warned that central banks around the world face growing political pressure to cut interest rates but policymakers need to maintain their independence.
Watch: Interest rates go unchanged by Fed. What they are and why they matter
Download the Yahoo Finance app, available for Apple and Android.
