Policymakers at the Bank of England have indicated that there will be at least three interest rate cuts this year, as they have observed promising indications of a decrease in inflation. Interest rates were maintained at 5.25% for the fifth consecutive time.
The financial industry anticipates three reductions of 0.25 percentage points within the current year, with the initial expected to occur in June. According to the Bank’s survey of financial institutions, they are predicting a decrease in rates to 4.5% by the end of 2024.
The inflation rate has significantly gone down in the last few months, as shown by the consumer prices index dropping to 3.4% in February. This is still higher than the Bank’s desired target of 2%, but much lower than the highest recorded rate of 11.1% in October 2022.
During the meeting, the Bank’s monetary policy committee (MPC) reached a decision to maintain current interest rates, with eight members in favor and the remaining member, Swati Dhingra, advocating for a reduction of 0.25 percentage points. This marks the first instance since September 2021 where no member of the MPC supported an increase in interest rates.
The UK pound decreased in value compared to the US dollar and euro due to expectations of a decreased interest rate on UK deposits this year. The pound dropped by 0.6% against the dollar at $1.27 and 0.2% against the euro at €1.16 following the news.
The governor of the Bank, Andrew Bailey, stated that there have been recent indications that inflation is decreasing. The decision to maintain interest rates at 5.25% was made in order to ensure that inflation will return to the established target of 2% and remain there.
“We have not yet reached a stage where it is possible to lower interest rates, but progress is being made in the right direction.”
The MPC anticipated that the economy will start to improve in the second quarter of this year, following a decline in national output and a recession in the UK during the second half of 2023 as measured by gross domestic product.
Companies are set to increase their investments, and the likelihood of having more spending money could result in a rise in the desire for products and services.
Typically, higher economic growth would lead to higher inflation. However, the government’s decision to freeze fuel duty and the recent decrease in energy and food prices should help keep inflation below 2% in the second quarter.
According to Martin Beck, the primary economic adviser at the EY Item Club, the MPC is concerned about the potential for stagnant growth in private sector wages and services inflation, as well as a challenging job market. However, he believes that there is still a compelling argument for a rate cut in the near future.
The decrease in energy costs signifies a possible decrease in inflation, which is expected to go below the Bank of England’s target of 2% in April and stay below the target for the rest of the year. According to him, more timely measurements of wage growth show a pace that aligns with the 2% objective, in comparison to the standard yearly measurement.
According to Carsten Jung, a highly experienced economist at the IPPR think tank known for its left-leaning stance, the significant decrease in inflation is indicative of the Bank of England’s excessive tightening, resulting in hindering potential future growth.
Suren Thiru, the head of economics at the accounting organization ICAEW, stated that the extensive impact of 14 interest rate increases in the past two years has not yet been completely realized.
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They said that the Bank of England is hesitant about reducing interest rates, despite the sharp decrease in inflation and a struggling economy in recession. This could potentially harm the economy further if they continue to maintain tight policies for too long.
For the fifth time in a row, the MPC voted to maintain interest rates at their current level. This decision was influenced by the increase in wages and ongoing inflation in the services sector, causing the committee to delay their plans to decrease the borrowing rate.
The Bank of England warned that the ongoing conflict in the Middle East could greatly impact prices, as recent attacks on shipping have highlighted the potential risk to the UK’s imports and exports.
In a written correspondence addressed to Chancellor Jeremy Hunt, Bailey provided an explanation for the ongoing inflation rate of 3% or higher. He stated that the decrease in the rate is due to a reduction in external cost pressures, but internal inflationary pressures continue to persist.
The central bank’s regional agents conducted a report and discovered a trend of increasing availability of labor for employers, accompanied by a decrease in pay demands.
The quote states that many employers are finding it easier to hire new employees. Some companies have also stopped holding onto excess workers since there are more opportunities in the job market.
Nonetheless, payment levels remained high and there were no indications of a significant decrease in wage growth as predicted by the Bank during its February assessment of the economy.
Source: theguardian.com
