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Base rate holds firm at 5.25% but long-awaited cut set for summer

Base rate holds firm at 5.25% but long-awaited cut set for summer
Paloma Kubiak
Written By:
Paloma Kubiak

The Bank of England (BoE) has maintained the base rate at 5.25%, adding to the pain for mortgage holders and credit borrowers, while savers breathe a sigh of relief in the hope of earning higher interest for longer.

The Monetary Policy Committee (MPC) voted by a majority of 7-2 to maintain the base rate at 5.25%. Two members preferred to cut the base rate by 0.25 percentage points to 5%, explaining that a less restrictive bank rate “would enable a smooth and gradual transition in the policy stance, and to account for lags in transmission”.

This is now the sixth consecutive time that the base rate has been frozen at 5.25% – last at this rate in March 2008.

It was a move widely predicted by industry experts, particularly following last month’s inflation figures. The latest data set showed it had eased to 3.2% in the year to March 2024, which is the lowest level since September 2021.

However, many speculated that the bank would require further evidence to support a rate cut, and minutes of the MPC meeting read: “The committee has judged since last autumn that monetary policy needs to be restrictive for an extended period of time until the risk of inflation becoming embedded above the 2% target dissipates.

“The MPC remains prepared to adjust monetary policy as warranted by economic data to return inflation to the 2% target sustainably. It will therefore continue to monitor closely indications of persistent inflationary pressures and resilience in the economy as a whole, including a range of measures of the underlying tightness of labour market conditions, wage growth and services price inflation.”

The minutes stated: “The committee will consider forthcoming data releases and how these inform the assessment that the risks from inflation persistence are receding. On that basis, the committee will keep under review for how long bank rate should be maintained at its current level.”

Inflation and base rate path

The committee added that it expects inflation to fall to return close to the 2% target in the near term, but to increase slightly in the second half of this year, to around 2.5%. Further, CPI inflation is projected to be 1.9% in two years’ time and 1.6% in three years.

Meanwhile, the market implied path for the base rate is that it declines from 5.25% to 3.75% by the end of the forecast period, compared with an endpoint of 3.25% given in February.

‘Enough uncertainty to merit caution’

Andy Mielczarek, CEO of Chetwood Financial, said: “Holding at 5.25% was the right decision by the Bank of England, as there remains enough uncertainty and stickiness around inflation to merit caution for a while longer.

“The reality is that despite recent decreases in inflation, we have yet to hit the bank’s 2% target. We are seeing signs that the economic landscape is warming, so we must ensure that we have the stability and resilience necessary for future growth.

“A high-interest environment means difficulties for those with variable mortgage payments contributing to an already high cost of living, but these are necessary evils for the UK’s economic recovery. As long as the base rate stays high, savers need to shop around to maximise the returns they are getting from the savings market and get their financial goals back on track.”

Speculation mounts over summer rate cut

Susannah Streeter, head of money and markets at Hargreaves Lansdown, said: “Policymakers are keeping a sharp eye trained on the rate of wage growth, which is still running at 6%, including bonuses. The concern is that companies may pass on those higher costs to customers. In the services sector, inflation was still at 6% in March, with prices particularly hot in bars and restaurants.

“Given the caution being expressed by some policymakers, the markets are not fully pricing in a rate cut until September, but August is also looking likely, and June still can’t be completely ruled out. Sentiment around the table at the Monetary Policy Committee will be closely watched, and if more members vote for a rate cut this time around, there will be a greater chance that one will finally land in the summer.”