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The Bank of England looks set to keep interest rates unchanged for longer as the UK’s policymakers hold out for firmer evidence that inflation is under control.
The central bank’s Monetary Policy Committee (MPC) is widely expected to hold interest rates at 5.25% when it announces its latest decision on Thursday.
It would mean a longer period of higher borrowing costs, which have squeezed households since interest rates started rising at the end of 2021.
The closer the inflation dial gets to 2%, the greater the pressure on the Bank of England to take its foot off the brake and cut rates
Laith Khalaf, head of investment analysis at AJ Bell
Higher interest rates are used as a tool to control inflation, which has fallen sharply in recent months.
The latest official figures showed that Consumer Prices Index (CPI) inflation slowed to 3.2% in March, as it edges closer to the Bank’s 2% target.
But economists think the Bank’s policymakers will want to hold out until they are more convinced that inflationary pressures have eased.
Laith Khalaf, head of investment analysis at AJ Bell, said: “It is almost certainly too early for the Bank of England to pull the trigger on a rate cut right now, especially against the backdrop of a more hawkish US central bank.”
The US Federal Reserve said last week it was keeping its key interest rate at the same level and noted a “lack of further progress” towards lowering inflation.
It means rates could stay higher for longer until there is firmer evidence of price rises easing, the Fed’s chairman Jerome Powell suggested.
Mr Khalaf said the Bank is also likely to be influenced by the European Central Bank, which is widely expected to cut rates in early June.
“The other important factor is more inflation readings for April and May, where CPI could get very close to, or possibly even hit, the Bank’s 2% target,” he added.
“The closer the inflation dial gets to 2%, the greater the pressure on the Bank of England to take its foot off the brake and cut rates.
“Markets currently think it’s a coin toss whether we get a UK rate cut in June, but this rises to a three in four chance priced in by August.”
At the last meeting in March, just one member of the MPC, Swati Dhingra, voted for rates to be cut by 0.25 percentage points, but the remaining eight members voted for no change.
Philip Shaw, chief economist at Investec, said: “This broad direction illustrates that collectively the committee is moving gradually towards a rate cut.
“It seems unlikely though to be ready to bite the bullet just yet and the Bank rate looks set to remain on hold at 5.25% for the sixth consecutive meeting.”
He added that it is possible that a second member of the MPC will switch to the “easing camp” and vote for a cut on Thursday.
Experts have also pointed out that two key economic indicators for the Bank of England – pay growth and services sector inflation – have remained more stubborn.
Average wages continued to increase faster than the rate of inflation last month.
Policymakers could therefore want to see more progress that the measures are slowing before they are confident cutting rates.
The Bank of England will shed more light on its predictions for the economy and the path of interest rates when it publishes the latest Monetary Policy Report alongside the rates decision on Thursday.
