Bank of England inches closer to first rate cut since 2020

The Bank of England (BoE) has taken a major step towards lowering interest rates, with a second official backing a rate cut and Governor Andrew Bailey expressing optimism regarding the trajectory of economic indicators.

In its latest announcement on Thursday, the BoE revealed that its Monetary Policy Committee (MPC) voted 7-2 to maintain rates at a 16-year high of 5.25 per cent, with Deputy Governor Dave Ramsden joining Swati Dhingra in advocating for a cut to 5 per cent.

The decision deviated from economists' expectations, as most anticipated another 8-1 split to uphold current rates. Despite maintaining rates for six consecutive meetings, the BoE hinted at the possibility of a rate cut in its upcoming June meeting, potentially aligning with Prime Minister Rishi Sunak's economic agenda.

Sunak, who has been reassuring voters about the economy's recovery, faces the challenge of narrowing the opposition Labour Party's lead in opinion polls ahead of an impending election later this year.

The BoE stressed its vigilance over economic data, indicating a readiness to assess the evolving inflation scenario. Notably, the Committee underlined its scrutiny of forthcoming data releases to evaluate the receding risks of inflation persistence.

Andrew Bailey remarked on the encouraging news regarding inflation but stressed on the necessity for further evidence before considering a rate cut, expressing optimism about the overall economic trajectory.

Investors speculate about the timing of a potential rate cut, with June being a contender amidst signals from other central banks, such as the European Central Bank's indication of reducing borrowing costs. The BoE's announcement prompted market adjustments, suggesting a potential rate cut as early as August, followed by subsequent reductions throughout 2025.

Revised inflation forecasts by the BoE, projecting figures below the 2 per cent target, have influenced market interest rate expectations, indicating a divergence from previous projections in February.

The MPC's discussions underscored differing views among members regarding the persistence of inflation pressures and the necessity for further evidence to warrant a rate cut.

Attention now shifts to forthcoming economic indicators, particularly labour market reports and inflation figures, ahead of the June MPC meeting.

Despite sluggish economic growth, the BoE slightly upgraded its growth forecasts for Britain's economy, providing some relief amidst political challenges faced by Sunak and the Conservative Party.

(With Reuters inputs)