Bank of England Holds Interest Rates

The Bank of England has opted to hold interest rates for the sixth consecutive month. Interest Rates continue to remain at 5.25%. Although this may be frustrating, the BOE governor, Andrew Bailey, indicated that they will cut rates within the next two months.

In 2024, inflation has decreased from 4% in January to around 3.2% in March. While this is slightly higher than the UK’s target of 2%, one could argue that interest rates have some leeway to fall, considering the improvement. However, the Monetary Policy Committee still wishes to keep interest rates at 5.25%.

Out of nine members of the committee, 7 voted to hold interest rates, and 2 to cut to 5%. The last time they voted, only one member voted to cut.

Inflation Data

According to the Guardian, Bailey said, “Before our next meeting in June, we will have two full sets of data – for inflation, activity and the labour market – that will help us in making that judgment a fresh”. The lack of data he mentioned refers to information provided by the Office for National Statistics. They collect 180,000 prices over 700 goods and can calculate the Consumer Price Index (CPI), which is the primary measure of inflation. 

He later made sure to say that cuts weren’t definite, nor a “fait accompli”. He simply suggested that prospects for a cut were possible. Interest rates are mainly determined by a country’s inflation. Increasing the cost of borrowing goods reduces people’s spending capacity. This will force businesses to reduce their prices, slowing the inflationary spiral. 

Financial markets and traders have been pricing for two rate cuts this year. The first will be in August. Traders predict a 50% chance of a rate cut.

Nationwide Responses

According to the BBC, Dr Karen Bonner, Principal Economist at Ulster University, says that although inflation is falling, the lack of pay rises in line with high-held interest rates paints a ‘subdued picture’. According to the public, the cost of living crisis is as prominent as ever.

During his announcement, Andrew Bailey stated several key things:

• Rate cuts may come faster than the market expects
• Many Bank of England decisions usually follow decisions taken by the US Federal Reserve. Bailey assures the press that they are not echoing the Feds. They are simply “taking the rest of the world into consideration”.
• Although Bailey claims that frequent global shocks affecting inflation have subsided, the UK is still not in a position to cut rates

According to the Guardian, Raj Badiani, economics director for an S&P Global agency, said that the UK’s preservation of interest rates “cast a dark shadow over the economy’s immediate recovery prospect”.

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