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Base rate cut ‘possible’ this summer

Base rate cut ‘possible’ this summer
Shekina Tuahene
Written By:
Shekina Tuahene
Posted:
20/05/2024
Updated:
20/05/2024

The Monetary Policy Committee (MPC) could reduce the base rate as soon as this summer, a former member has predicted.

In his last speech at the Bank of England about a potential base rate cut, Ben Broadbent, deputy governor of monetary policy at the central bank, said the direct effect of inflation due to the pandemic and the Russia-Ukraine war had “now faded”. 

Broadbent has been in the role since July 2014 and his tenure will end in June. 

He said the pandemic and the war accounted for most of the rises in inflation in 2021 and 2022, but the second-round effects of this on a rise in domestic inflation still lingered. 

Broadbent said it was “unclear” how long this would persist, but if it mirrored the time it took to impact the economy in the first place, the effects could “unwind relatively quickly, within the next year or so”. 

The central bank calculated that the hit to real national income had since “been reversed” and the second-round effects of inflation on the economy peaked last year in autumn. 

Broadbent said: “Monetary policy is more restrictive now than in 2022 and the first half of last year.” 

However, he said the MPC forecast in its reports that the effects of inflation could take longer to undo than it did to set in. 

Broadbent said there were a range of views across the MPC, but it would “continue to learn from the incoming data”. 

He added: “If things continue to evolve with its forecasts – forecasts that suggest policy will have to become less restrictive at some point – then it’s possible bank rate could be cut some time over the summer.” 

At the last MPC meeting earlier this month, it was decided that the base rate would be held at 5.25%. 

This was the sixth consecutive meeting where the base rate was held at its 16-year high, and two members voted to cut the rate by 0.25% to 5%, saying a lower rate would “enable a smooth and gradual transition in the policy stance, and to account for lags in transmission”. 

UK economy more open to global shocks

Broadbent said the openness of the UK’s economy meant that, while the country is able to buy and consume goods that would be costly or impossible to produce locally and access new technologies developed worldwide, “we’re more sensitive to global shocks”.

He said data showed that “at least 90% of variations in UK growth over the past 15 years have been caused by foreign, or at least common, shocks”.