Bank of England holds rates at 5.25%

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The Bank of England has kept UK interest rates on hold at 5.25 per cent, pushing sterling lower as the central bank signalled it is edging closer to cutting borrowing costs.

Governor Andrew Bailey said things were “moving in the right direction” on inflation after the BoE’s Monetary Policy Committee held the benchmark rate at its 16-year high for the fifth successive time.

Two members who had previously called for higher interest rates dropped their demands, instead voting with the majority for unchanged rates.

After Thursday’s announcement, sterling fell against the dollar to trade down 0.4 per cent on the day at $1.273.

The FTSE 100 index was 1.5 per cent higher. Interest rate-sensitive two-year gilt yields were steady at 4.14 per cent. 

Traders in swaps markets moved to fully price in three 0.25 percentage point cuts this year. They put the likelihood that rate cuts would begin by June at 73 per cent, marginally up from around 70 per cent earlier in the day.

“In recent weeks we’ve seen further encouraging signs that inflation is coming down,” Bailey said. “We’re not yet at the point where we can cut interest rates, but things are moving in the right direction.”

The BoE’s increasing optimism on inflation comes after the US Federal Reserve sparked a market rally overnight, with officials indicating they want to cut interest rates by three-quarters of a percentage point this year.

The Swiss National Bank unexpectedly cut its key rate on Thursday, while the European Central Bank has also suggested it will lower borrowing costs by June.

The BoE noted an “improving outlook” for the UK economy, which fell into a technical recession in the second half of last year.

Pressure from Britain’s ruling Conservatives for cuts is likely to intensify ahead of the general election expected this year.

In new language that signalled that meetings from now on will actively debate rate cuts, the BoE said the MPC would “continue to consider the degree of restrictiveness of policy at each meeting.”

The bank said on Thursday that official data has shown inflation has fallen “relatively sharply” since the last MPC meeting in February.

In figures published this week, headline consumer price inflation for February dropped more than expected to 3.4 per cent — the lowest rate since 2021.

The BoE now expects inflation to fall slightly below its 2 per cent target in the second quarter of the year, as wage growth slows. On Thursday it said that, even after rates are cut, they will still be high enough to combat inflation.

But the bank warned that inflation remains “elevated” for service prices, which rose at an annual rate of 6.1 per cent last month.

In an indication of continuing internal splits, the BoE noted that MPC members differed “on the extent of evidence” of falling price pressures that would be required to cut rates.

At this week’s meeting, all but one of the nine MPC members voted to keep rates on hold, with Jonathan Haskel and Catherine Mann dropping their previous calls for quarter-point rises. One member, Swati Dhingra, continued to vote for an immediate cut.

The last time no one voted for a rate increase on the MPC was in the autumn of 2021.