The Bank of England has held interest rates at 3.75% but signalled that further cuts are now “likely” later in the year as inflation falls back to the Bank’s 2% target faster than expected.
In a narrow decision, five members of the nine-member Monetary Policy Committee (MPC) voted to maintain rates at the level set in December, with governor Andrew Bailey casting the deciding vote, while four favoured a further 0.25 percentage point cut to 3.5%.
The tightness of the vote and an apparent hardening of the Bank’s language suggests the next rate cut could come as soon as the next MPC meetings in mid-March or early April.
Money latest: What interest rate hold means for your money
Before the publication of the MPC decision and minutes, markets had priced in two further rate cuts this year.
“We now think that inflation will fall back to around 2% by the spring,” said Mr Bailey, “That’s good news. We need to make sure that inflation stays there, so we’ve held rates unchanged at 3.75% today. All going well, there should be scope for some further reduction in the Bank rate this year.”
More rapidly falling inflation
Bank of England governor holds key to ‘likely’ rate cuts ahead
Bank of England rate cut to 3.75% following fall in inflation
Were it not for the upcoming budget, interest rates could have been cut
The decision reflects the Bank’s latest forecast, which shows inflation falling back to 2% in the second quarter of the year, a more rapid decline than previously thought from the 3.4% recorded in December.
The Bank’s forecast concluded that cuts to energy bills announced in the budget will shave around 0.5 percentage points off inflation, with a decline in food price rises also contributing.
Last November, Chancellor Rachel Reeves announced changes to the way energy bills are calculated, saying they will save the average household around £150 a year, as well as freezing rail fares and fuel duty.
The Bank also cuts its forecast for already-listless GDP growth from 1.1% to 0.9% this year and an increase in unemployment to 5.3%, potentially creating room for further cuts.
Despite this, a majority of members of the MPC decide to hold rates, citing the need to balance the risk of persistent underlying inflation, driven by rising wages, against the danger that increasing unemployment and subdued spending could drag inflation below the 2% target.
“The risk from greater inflation persistence has continued to become less pronounced, while some risks to inflation from weaker demand and a loosening market remain,” the committee said.
Scepticism of government measures
The timing of further cuts will depend on the Bank’s assessment of how sustainable the 2% inflation rate is in the medium term, with some members sceptical that the short-term-measures announced by Ms Reeves will offset underlying upward pressure on prices.
The decision to hold rates came after Mr Bailey switched sides from the last meeting in December, joining Megan Greene, Clare Lombardelli, Catherine Mann and Huw Pill in favouring the status quo.
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In December, he voted with the four dovish members of the MPC, Sarah Breedon, Swati Dinghra, deputy-governor Dave Ramsden and Alan Taylor, who favoured a cut.
