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Stick or twist? Bank of England base rate rumours and predictions

Stick or twist? Bank of England base rate rumours and predictions
Matt Browning
Written By:
Matt Browning

On Thursday, the Bank of England will confirm whether it will cut the base rate or stick at 5.25%.

After five successive votes by the Monetary Policy Committee (MPC) to hold the rate, speculation has swirled as to when the axe will be yielded.

Since the last base rate announcement, the Consumer Prices Index (CPI) measure of inflation eased to 3.2% for the year leading up to March.

That’s the lowest level since September 2021, but perhaps not enough for the committee to vote in favour of a rate cut just yet, according to many economic experts.

The higher interest rates are set, the lower inflation will likely be, as shoppers tend to pay less money for goods picked up in the CPI figures.

One committee member predicted to vote for cut

Steve Matthews, investment director at Canada Life Asset Management, expects an 8-1 vote in favour of no cuts being made to the base rate. The director even speculated on which of the nine members would vote for the cut.

He believes Swati Dhingra will be “the lone outlier”, as she was the only member to vote for a rate cut in the previous decision. Dhingra has also described a rate-hold as “scarring” to UK households.

Matthews said: “While there’s optimism within the Monetary Policy Committee that inflation will close in on the all-important 2% as the fuel effect falls out, the Bank of England will be deeply aware of the second-round inflation effect.

“Rather than patting itself on the back when the 2% figure is hit, it will require clear evidence that inflation is under control rather than simply hitting a target.”

Matthews thinks a first cut in August is the “most likely scenario”, which would mean another stagnated base rate during the 20 June meeting.

‘First cut in coming months’

Paul Dales, chief UK economist at Capital Economics, is sure there will be no movement this week but did not rule out a change next month.

Dales said: “The Bank of England will almost certainly leave interest rates at 5.25% on Thursday 9th May, and we suspect it will imply it’s still not quite ready to cut rates. That said, there’s a chance it instead indicates that the first rate cut will be in the coming months.

“Either way, our forecast that inflation will fall faster than the bank expects may mean rates are first cut in June and fall to 3% next year. That compares to market pricing for an August cut and a low of just 4%.”

The Organisation for Economic Co-operation and Development (OECD) also agrees with commentators that the vote revealed on Thursday will see a sixth consecutive hold.

As well as the UK experiencing a “sluggish” economic year, it also forecasts the rate will eventually drop to 3.75%, but not until the end of next year.