The Bank of England (BoE) held the base rate at 5.25% this week, but hinted that rate cuts could start earlier than previously expected.
The base rate was held for the fourth month in a row, a decision made on a 6-3 vote.
Two of the Monetary Policy Committee’s (MPC) members wanted the base rate to rise to 5.5%, while one voted for a cut to 5%. This decision was made along with the news that the MPC expected inflation to reach the 2% target in Q2, before rising again in Q3.
The revised outlook for inflation – in which it is now projected to return to its 2% target in May 2024, rather than Q4 2025 – will bring relief that the UK’s two-year battle with high inflation could be finally coming to an end.
Experts at Deutsche Bank noted that “we see today’s decision as a further shift from the Bank’s more hawkish message late last year. The wheels are in motion: we continue to think we are one step closer to a May rate cut.”
In research notes entitled BoE Recap: one step closer to May, researchers at the bank said: “While the Monetary Policy Report (MPR) highlighted a more balanced view on the rates outlook, both the minutes and press conference – in our view – highlighted more asymmetric dovish risks. The debate around how restrictive rates are has officially begun. And with the first vote cast to adjust Bank Rate lower, we think the door for spring rate cuts remains very much open.
“Today’s decision, we think, has left the door wide open for a May cut – our base case since summer last year. But, equally, we think risks remain skewed to a later start date, with the majority of the committee potentially requiring even more confidence to adjust Bank Rate lower.”
