The UK central bank kept interest rates at a nearly 16-year high of 5.25% on Thursday — but opened up the possibility of cutting them as inflation falls.
Bank of England governor Andrew Bailey said inflation was “moving in the right direction” after he and his colleagues scrapped a previous warning that rates could rise again.
Instead, Bailey said borrowing costs would be kept “under review.”
Six members of the central bank’s Monetary Policy Committee (MPC) voted to keep rates at 5.25%, but Jonathan Haskel and Catherine Mann opted for a 0.25 percentage-point rise, and Swati Dhingra supported a cut of the same size.
Bailey said getting inflation down to its 2% target would not be “job done” because of the risk it could rise again — but he said there was a shift in the central bank’s thinking.
“For me, the key question has moved from ‘How restrictive do we need to be?’ to ‘How long do we need to maintain this position for?'” he told a press conference.
Daniel Mahoney, UK Economist, Handelsbanken: “February’s Bank of England (BoE) interest rate decision is split three ways: six members backed a freeze in rates, while two opted for an increase of 25bps and one for a cut of 25bp.
“This was a somewhat more hawkish result than was expected by markets. The majority of MPC members judged that even though services inflation and wage growth had fallen more than expected, there were enough indicators of persistent inflation to warrant a hold in rates.
“The two backing an increase argued that embedded inflation persistence remained a risk and justified a more hawkish position, while one member backing a cut to rates claimed that lags in the transmission of monetary policy require Bank rate to become less restrictive.
“The BoE is now expecting CPI to fall to target of 2% in Q2 2024, although it projects that this will increase again in Q3 and Q4 owing to base effects in the energy component of inflation.
“While the inflation picture is more sanguine compared to the November forecast for early to mid-2024, CPI is expected to remain above the 2% target in two years’ time due to the persistence of domestic inflationary pressures, if market expectations for interest rates are followed.
“It is also notable that the CPI projection is skewed to the upside over the next six months owing to geopolitical factors. Growth prospects for the UK remain muted in the short term, according to the latest BoE inflation report, with four-quarter growth in Q1 2025, expected to be 0.5% and Q1 2026 expected to be 0.8%.
“Yesterday, the Federal Reserve again clearly indicated that interest rate cuts were on the horizon. No such pronouncement has been made by the BoE today.
“The MPC minutes state that “monetary policy will need to remain restrictive for sufficiently long to return inflation to the 2% target sustainably in the medium term” although they add that ‘the Committee will keep under review for how long Bank Rate should be maintained at its current level’.
“The BoE will be pleased that inflation has registered below its November expectations, and that this was driven by broad-based factors, and that nominal wage growth is on a downward trajectory. However, it is clearly too soon, in the MPC’s collective view, to conclude that policy can become less restrictive while there remains a risk of persistent domestically-generated inflationary pressures.
“Markets continue to predict four rate cuts this year, but we remain of the view that this is too dovish a position. Our view remains that there will be three rate cuts this year starting in June and that QT continues in the background on the basis of the pathway set out at the September 2023 MPC meeting.”
Susannah Streeter, head of money and markets, Hargreaves Lansdown: “Interest rate cuts are still in the pipeline this year, but it’s clear they’ll take a bit more time to flush out. Inflation is expected to return to 2% in the middle of this year – but not for long.
“It’s expected to rise again in the second half of the year. The Bank of England didn’t waver from the line that monetary policy would have to ‘remain restrictive’ for ‘an extended period of time’ until inflation is ‘sustainably’ at 2%.
“Much of the broader economic picture adds weight to the argument for cuts. Growth has been stagnant, and it’s likely the economy tipped into a very mild recession at the end of 2023, with companies and consumers showing a lot more caution in their spending patterns. Discounting in January helped push down shop price inflation to the lowest rate since May 2022.
“Company insolvencies have shot up as the era of high interest rates has bedded in and amid worries about an uncertain economic outlook, underlying price pressures have shown signs of easing, with high wage growth dropping back a little. Inflation has also fallen faster than the Bank forecast back in November, despite the bump in December.
“However, pay rises are still threatening to stay hotter than the Bank of England wants and even though energy bills are forecast to drop sharply in April, the creeping rise in crude prices, sparked by widening conflicts, is still a bubbling worry.
“The risk is that companies will pass on higher costs, with the British Retail Consortium warning this week that geopolitical tensions will also add to uncertainty and costs in supply chains. Business activity has found better form since the start of this year, with the PMI snapshot showing an expansion in January.
“The Bank’s policymakers are highly unlikely to make a move before the March Budget, given that voter sweeteners like tax cuts and duty freezes could see demand in the economy tick up. The impact of delays to imported goods re-routed from the Red Sea is still uncertain, and could tip some prices upwards.”
Kevin Brown, savings specialist at Scottish Friendly: “Holding the base rate at 5.25% is a signal that the Monetary Policy Committee won’t be deviating from its path of fiscal discipline just yet. Clearly the MPC believe it’s too early to turn the heat down on inflation especially as the wider economy isn’t quite in recessionary territory.
“It remains a delicate balancing act though. Many investment market devotees believe a cut can’t be far off and that sentiment will be encouraging for mortgage holders. But for savers and retail investors it does start to beg the question what is the best home for their money as we move deeper into 2024?
“The wider economic picture remains uncertain and rates on cash savings accounts remain high relative to recent years. However, if the base rate begins to tick down further there may be more people looking towards investment markets for the greatest potential to beat inflation.
“As always careful planning is required from families to balance short-term, mid-term and long-term priorities. But if people can adopt a longer time horizon for their cash, then now might be the time to seriously consider committing to investing again as part of a diversified approach.”
Ed Hutchings, Head of Rates at Aviva Investors: “Once again, the Bank of England kept rates at 5.25%, but there were changes to the voting pattern – with Dhingra the first MPC member to vote for a cut.
“Given the three-way split in voting, it’s clear hawkish concerns remain amongst MPC members, but there has been a shift in a dovish direction.
“However, it’s arguable that a bigger shift from the hawks is needed for a cutting cycle of any kind to really begin. For now, we would expect the Sterling to hold up and for gilt yields to continue some of their recent cross-market under-performance.
“Looking past this, and with past hikes still yet to feed through, it’s clear we are getting closer to the first cut, which should in time be ultimately supportive for gilts as an asset class.”
Nicholas Hyett, Investment Manager at Wealth Club: “Before Christmas investors had built up a picture of central bankers as trigger happy rate cutters, just waiting for the first excuse to get rates falling once again. Stock markets shot up as a result, and mortgage rates have started to fall.
“Well, there’s little evidence central bankers are rate cut hungry in today’s MPC report. Rates were unchanged as expected, but two MPC members voted to increase rates – arguing that monetary policy need to be restrictive for longer to get core inflation back under control.
“There’s a certain logic to that. The economy isn’t glowing. But it’s not screaming in distress either. Growth is ping-ponging around zero, and wage growth is slowing but still moving upwards and rising energy prices could yet move inflation higher again later in the year.
“But monetary policy is a supertanker not a speedboat – leave a change of direction too late and the economy will hit the rocks before central bankers can get it to slow.”
Lindsay James, investment strategist at Quilter Investors: “The Bank of England has continued its steady as she goes approach with interest rates by holding them again. Given economic growth is stagnating but not yet properly declining, and with confidence improving, the BoE will want to keep its powder dry before pivoting to rate cuts later in the year.
“Indeed, the latest inflation figures show that while it is falling, the journey back to 2% is not a smooth one, and thus they will not want to jump the gun and cut too early. Given the fragile nature of this economic environment, and the geopolitical risks playing out, Andrew Bailey and co will take a cautious approach rather than risk another inflation spike.
“What is likely to switch the conversation on rate cuts is if the 2% target is hit sooner than thought. However, we are beginning to see signs that the BoE may move soon as there was a vote at today’s meeting for a cut.
“There is a chance that it is reached in April, but with recent readings showing an unexpected jump, and some forecasts suggesting that attainment of the 2% level will be short-lived, the Committee is keen to mirror the Federal Reserve in promoting a ‘data dependent’ approach.
“It is likely though that rate cuts will need to be brought in sooner rather than later. The UK economy is in somewhat of a malaise, and rates at this level for too long may end up being overly constrictive. It remains to be seen if a recession can be dodged, and even despite the improving backdrop, failure for economic growth to materialise may just spark the BoE into action.”