Bank of England triggers fantasies of interest rate cuts
The Bank of England has kept its benchmark interest rate at 5.25%. However, the central bank's monetary policy committee has raised hopes of a 25 basis point cut in June. This was not only due to the reduction in inflation forecasts for the coming years. Central bank economists also believe that the inflation target of 2.0% could soon be reached.
One more dove
As revealed by the minutes of the Monetary Policy Committee (MPC) meeting, this time two of the nine members argued in favour of a downward shift in rates. In addition to Swati Dhingra, who had already previously supported monetary policy easing, Dave Ramsden, a deputy governor of the central bank, also voted for an interest rate cut.
Even though the majority of MPC members supported the status quo, the minutes contained the statement that „key indicators for sustained inflation broadly continue to recede as expected.“ Financial markets promptly priced in a higher probability of rate in June.
Chancellor of the Exchequer Jeremy Hunt„I would much prefer if they waited until they are absolutely sure that inflation is on its way down, rather than making a hasty decision that they would later have to revise.“
Jeremy Hunt calls for caution
„I would much prefer if they waited until they are absolutely sure that inflation is on its way down, rather than making a hasty decision that they would later have to revise,“ commented Chancellor of the Exchequer Jeremy Hunt. He wants sustainably low interest rates. He added that it is encouraging that Andrew Bailey, Governor of the Bank of England, has expressed optimism for the first time, indicating that they are on the right track.
Before the June meeting, more labour market and inflation data is scheduled to be released. The 10% increase in the statutory minimum wage will feed into this data. In the inflation report released on May 9, a inflation rate of 1.9% for 2026 and 1.6% for 2027 is mentioned. Both are below the Bank of England's inflation target. Both suggest that market expectations for the level of interest rates in the coming years have been too high. It was the first time since November 2022 that the central bank economists revised their inflation forecasts downward.
„Do you believe in fairy tales?“ ask the economists at HSBC in their analysis of the interest rate decision. While the MPC has dissenters who do not want easing, the story it generally puts out is a Goldilocks scenario, where monetary policy does not allow the economy to overheat, but nor does it allow it to cool down. However, there are still risks that could lead to a slower pace of rate cuts.
