Bank of England leaves interest rates on hold with Bailey hailing ‘good news’ on inflation

The Bank of England has kept interest rates on hold for the fourth meeting in a row while policymakers pushed back against expectations of imminent rate cuts. 

The decision means the Bank Rate remains at a post-financial crisis high of 5.25 per cent, a level reached last August.

Six members of the nine-strong Monetary Policy Committee (MPC) backed a hold, while two – Catherine Mann and Jonathan Haskell – favoured a further 25 basis point hike. 

Swati Dhingra, the MPC’s most dovish member, opted for a cut. This is the first time an MPC member has voted for a cut since the pandemic.

The Bank removed any references to hiking rates further, noting inflation has “fallen back relatively sharply” over the past few months, but gave no timetable for cuts. 

Commenting on the decision, Andrew Bailey, governor of the Bank, acknowledged the “good news” on inflation over the past few months. 

However, he said “we need to see more evidence that inflation is set to fall all the way to the two per cent target, and stay there, before we can lower interest rates”. 

The Bank was forced into aggressively hiking interest rates over 2022 and 2023 as it sought to quell a sudden burst in inflation which was fuelled by the Russian invasion of Ukraine. Inflation peaked at over 11 per cent back in October 2022.

Since then, inflationary pressures have eased prompting markets to start considering when interest rates might be lowered.

Inflation ended 2023 at four per cent, significantly below where the Bank thought it would be in its November forecasts. Then, the Bank predicted inflation would only have fallen to 4.6 per cent.

The MPC noted that recent falls had been “broad-based, reflecting lower fuel, core goods and services price inflation”. 

Reflecting the fall, markets now think that the Bank will start lowering interest rates in late spring with a further four cuts priced in for 2023.

The MPC said it would “keep under review” how long Bank Rate would be kept at its current level.

“Monetary policy will need to remain restrictive for sufficiently long to return inflation to the two per cent target sustainabily in the medium term,” it said. 

Services inflation and wage growth, both of which the Bank have flagged as indicators of domestically generated inflation, have also come in below the Bank’s forecasts.

Progress on these fronts was noted, but the MPC still sounded a note of caution. “Key indicators of inflation persistence remain elevated,” the statement said. 

The risk of persistent inflation could be seen in the Bank’s inflation forecasts. Although it suggested falling energy prices would help inflation touch two per cent in the second quarter of this year, it would then pick up again in the second half. 

The forecasts, which are based on market pricing, show that inflation will remain above target in two years time reflecting “the persistence of domestic inflationary pressures, despite an increasing degree of slack in the economy”. 

The MPC also flagged the risks stemming from “geopolitical factors,” such as the disruption to global shipping from Houthi attacks in the Red Sea. 

The decision comes just a day after the US Federal Reserve left rates on hold again. Fed chair Jerome Powell pushed back against market expectations on when rates cuts will begin, warning a March cut was “not base case”.

The European Central Bank (ECB) also left interest rates on hold last week.