The Bank of England’s Monetary Policy Committee (MPC) has voted to maintain the Bank Rate at 5.25%, postponing the much-awaited rate-cutting cycle further into the year.
The vote had a majority of 7 to 2, with two members preferring to reduce the rate by 0.25 percentage points to 5%. The tougher line prevailed, however, leaving interest rates at their 16-year high.
The outcome was priced in as a 95% chance earlier today, as noted by Tom Hopkins, senior portfolio manager at BRI Wealth Management, but markets are increasingly worried about the impact on the economy.
Nicholas Hyett, investment manager at Wealth Club, said that while the central bank continues to diagnose persistent inflation as the major danger facing the UK economy, “there’s a real risk the economic cure might end up being worse than the disease”.
“It’s an increasingly delicate balancing act. In this murky picture, the inclination is to sit on the fence a little longer, especially since cutting too early risks sinking sterling and kick starting another bout of inflation,” he said.
“Leave interest rate cuts too late though and the Bank risks accidently cratering the economy in its eagerness to get inflation under control. The MPC’s two dissenters clearly think that risk is growing.”
Inflation is now expected to return to around the 2% target in the near term, before rising again later in the year. Quilter Investors investment strategist Lindsay James said a process of gradual rate cuts “may soon begin” and that inflation is now close to being under control.
“Inflation is less likely to spike given energy prices are well off their highs and storage levels remain robust after a mild winter,” she said.
“Focus can thus turn to supporting economic growth at a time when the UK economy is struggling to escape the orbit of a growth rate that is effectively zero.”
While this feels significant, she also said it’s important not to get ahead of ourselves, noting that markets have been “a little giddy” in recent quarters about the prospect of interest rate cuts.
“The floodgates won’t simply just open. Central banks have a tendency to be fairly conservative and so expectations for just two rate cuts by year end look reasonable.
“Slow and steady will be the order of the day when the time comes for the Bank of England to start cutting,” she concluded.