- Michael Race
- Business reporter, BBC News
image source, Getty Images
The head of the Bank of England said he needed to “see more evidence” that price rises have slowed further before cutting interest rates.
Andrew Bailey said he was “optimistic that things are moving in the right direction” as rates were kept at 5.25%.
He said the Bank expects inflation, which measures the rate of price growth, to fall “close to” the target level in the next few months.
This paves the way for interest rate cuts already in June.
But Mr Bailey warned that the cuts were “not a fait accompli, not a done deal”.
August or September seems the most likely time, especially if inflation falls as expected.
The interest rate set by the Bank is dictated by the rates set by High Street banks and lenders. Rates are currently at their highest level in 16 years which means people are paying more to borrow money for things like mortgages and loans, but savers have also received better returns.
Mr Bailey said there was “encouraging news” on inflation, currently at 3.2%, but said the Bank needed “more evidence” that it would remain low before cutting rates.
However, at a press conference after the Bank’s decision, Mr Bailey said it was “likely that we will have to cut bank rates in the coming quarters” and more than financial markets are currently predicting.
The nine-member Monetary Policy Committee, which votes on rates, appeared to be edging closer to a cut with two voting to cut rates and the remaining seven voting to keep them on hold.
The bank was more positive about the outlook for the UK economy in its latest forecast, the forecast
- Inflation is forecast to fall to the Bank’s target of 2% in the coming months and to 1.9% in 2026.
- Economic growth of 0.4% in the first three months of 2024 and 0.2% from April to June
Chancellor Jeremy Hunt said policymakers would “much rather” wait until they are absolutely sure inflation is falling than “rush into a decision they had to reverse at a later stage”.
But he added that it was encouraging to see “real optimism” from Mr Bailey for the first time.
But Darren Jones, shadow chief secretary to the Treasury, said that while it was the Bank of England’s “independent right” to set interest rates, it was “bad news for people at home who have to reset their mortgages for years to come at higher rates and people have to pay rent for their homes.”
The health of the UK economy is in the spotlight with economic policies likely to be a key battleground in the battle for votes in the upcoming general election expected later this year.
Asked on Thursday whether the economy had turned a corner, Mr Bailey said: “All the evidence we’re seeing is that we’ve turned a corner.” But he warned that it was not a “strong recovery”.
‘It’s scary to wait for rates to fall’
Paul Day, 62, from Felixstowe, says his mortgage will rise by £225 a month when his five-year fixed contract expires at the end of May.
Mr Day, who is retired, currently pays £1,027 a month but when his fixed rate of 1.89% runs out, he will switch to his lender’s standard variable rate of 7.99%.
“It’s been a terrifying three months waiting for the interest rates to go down, and I’m getting closer and closer to my deadline, which is May 31, and they haven’t,” he says.
He chooses to switch to a variable rate because he doesn’t want to be “stuck” on another fixed rate.
“I think things should calm down in the next six months. So it’s a gamble,” he says.
Following the Bank’s latest comments, financial markets now expect rates to be cut to 5% by August and then cut to 4.75% in November or December. Additional rate cuts are forecast for 2025.
The bank began raising interest rates in December 2021 and has held interest rates at 5.25% since last summer in an attempt to slow the pace of consumer price increases – and to reduce the cost of living.
Prices began to rise rapidly as demand for goods increased following the lifting of Covid-related restrictions. Energy and food prices then spiked following Russia’s invasion of Ukraine, leading to inflation rising to over 11% in October 2022 – the highest rate in 40 years.
Electricity and bills have since fallen, but no further declines are expected.
By making borrowing more expensive, the Bank hopes to encourage people to cut back on spending, which in turn leads to a drop in demand for goods and a slowdown in price growth.
But it’s a balancing act, as high interest rates can hurt the economy and limit growth, as businesses forgo investment in production and jobs.
The UK slipped into recession late last year when the economy shrank for two consecutive quarterly periods, but the Bank said it believed the downturn may already be over, with official figures released on Friday set to confirm that.
The bank said it expected the economy to do slightly better this year, partly due to population growth and some measures in the government’s spring budget, such as cuts to national insurance.
What to do if I can’t pay my debts
- Take control. Advice for citizens suggests that you calculate how much you owe, to whom, which debts are most urgent and how much you have to pay each month.
- Request a payment plan. Energy suppliers, for example, must give you the chance to settle your debt before taking any action to recover your money