Bank of England says ‘more evidence’ needed before cuts as it holds rates at 5.25%

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The Bank of England said it required “more evidence” that inflation was falling before implementing interest rate cuts, as it held borrowing costs at 5.25 per cent.

At Thursday’s meeting of the Monetary Policy Committee, the BoE signalled it was ready to consider cutting rates for the first time since inflation surged after the coronavirus pandemic — but would not do so yet.

“We need to see more evidence that inflation is set to fall all the way to the 2 per cent target, and stay there, before we can lower interest rates,” said Andrew Bailey, BoE governor.

He added that, with service price inflation still high and the negative contribution of falling energy prices set to fade in coming months, the BoE could not yet declare that “the job is done”. 

Traders scaled back their bets on spring rate cuts after the announcement. Swaps markets were pricing in a roughly 45 per cent change of a reduction by May, down from 60 per cent earlier in the day.

But Bailey added that the bank had seen “good news on inflation over the past few months”. The BoE also said it would “keep under review” how long rates should be held at current levels.

In a further indication that rates have peaked, the bank ditched previous language that warned “further tightening” might be needed if inflation is more persistent than expected.

Both the Federal Reserve and the European Central Bank have signalled in recent days that they will hold off rate cuts until they see more evidence inflation is fully under control.

US Fed chair Jay Powell said on Wednesday that cuts in March were not his central bank’s “base case”.

The benchmark FTSE 100 barely moved following the BoE’s announcement, up 0.4 per cent. The mid-cap FTSE 250 remained 0.2 per cent lower. 

The BoE forecast that consumer price inflation would “fall temporarily” to its 2 per cent target in the second quarter before increasing during the remainder of this year.

It warned that headline inflation, currently 4 per cent, would remain “above target over nearly all of the remainder of the forecast period”, at 2.3 per cent in two years’ time and 1.9 per cent in three years’ time.

Such predictions suggest the central bank does not expect rates to be cut as aggressively as some investors have been assuming.

The new BoE outlook is being closely watched by chancellor Jeremy Hunt, since a fall in borrowing costs could increase his scope for cutting taxes ahead of his March 6 budget.

But Hunt told the BBC that he did not expect to have the same latitude for tax cuts as in November’s Autumn Statement, when he reduced national insurance contributions.

The BoE reiterated that monetary policy would need to remain “restrictive for sufficiently long” to return inflation to the 2 per cent target on a sustainable basis.

The central bank stressed that, while the labour market had cooled, with risks from domestic wage and price pressures now “more evenly balanced”, it remained “tight by historical standards”.

The BoE upgraded its forecast for 2024 growth, which it now says will be 0.25 per cent — up from its previous prediction of zero growth. It forecasts 0.75 per cent growth for 2025.

While the majority of the MPC backed keeping rates on hold at Thursday’s meeting, one member, Swati Dhingra, called for a quarter-point reduction in interest rates, saying inflation was now on a “firm downward trajectory”.

Her vote for an immediate cut prompted the MPC’s first discussion of the merits of lowering rates since the rate-raising cycle began in 2021.

Megan Greene, who previously advocated higher rates, fell into line with the majority in advocating unchanged rates at the meeting. Two other MPC members — Jonathan Haskel and Catherine Mann — continued to demand a further quarter-point increase.