Bank of England says it could lower interest rates more than expected, but June cut isn’t ‘fait accompli’ – as it happened

Time to wrap up….

The Bank of England has signalled it could start cutting interest rates as early as June after inflation was found to be “moving in the right direction”, as it kept borrowing costs on hold at 5.25% for the sixth time in a row.

Alongside the decision to keep rates on hold, the Bank said inflation was already on course to hit its target of 2% and would fall to just 1.6% in two years, opening the door to future cuts in interest rates.

Giving a more upbeat assessment of the economic outlook than in its February report, the Bank also suggested the UK recession had ended, predicting the economy had grown 0.4% in the first three months of the year. The Office for National Statistics will publish the official estimate of growth on Friday [7am, see you there!].

The nine members of the Bank’s rate setting monetary policy committee were split on the decision to hold interest rates, with two members – Swati Dhingra and Dave Ramsden – voting for an immediate cut to 5%. Dhingra was the lone voice calling for a rate cut at the previous meeting of the MPC.

BoE governor Andrew Bailey said he was “optimistic” that things were moving in the right direction.

Bailey told reporters in London that

• The big global shocks” that drove up inflation have faded.

• The Bank has lowered its expectations for how persistent inflation will be

• A change in Bank Rate in June is neither ruled out nor a fait accompli.

• Rates are likely to be cut in the coming quarters, and possibly by more than is currently expected by markets

Stocks in London hit fresh record highs, as investors anticipated an easing in borrowing costs soon.

Here’s the full story:

And our analysis:

Plus here’s the rest of today’s news:

The sight of the Bank of England inching towards a summer interest rate cut has pushed up London’s major stock index to a new closing high.

The FTSE 100 has ended the day at a new closing peak of 8381 points, up 0.3% today, extending its recent rally.

It had earlier hit a new intraday high of 8396 points.

Anglo American (3%), the mining giant which recent rejected a takeover approach from rival BHP, were the top riser, followed by retailer JD Sports (+2.9%) and grocery tech firm Ocado (+2.3%).

Housing stocks also had a strong day, with home builder Taylor Wimpey up 1.7% and online estate agent Rightmove gaining 2.1%.

BoE governor Andrew Bailey has told Bloomberg that ‘all meetings are live’.

And when asked whether a rate cut in June was “likely”, he explains that the Bank has changed on its view on the likely persistence of inflation.

That’s “good news”, he adds.

Bank of England governor Andrew Bailey appears to be closer to voting for a rate cut than the majority of his committee, suggests ING economist James Smith.

Today’s Monetary Policy Report, minutes and press conference have increased the chance of a June interest rate cut in the UK “at the margin”, argues Simon French of investment bank Panmure Gordon.

It was not just the vote - with Dave Ramsden voting for an immediate 25bp reduction - but the Governors’ comments that reinforced the idea of the MPC plotting a narrow path that eases financial conditions yet keeps them on a restrictive setting.

French says its understandable that cracks have appeared within the monetary policy report over how to interpret the latest data. He reckons the UK is about to enter a period where inflation is lower than target, and compared to major rival economies too:

June or August for the first cut remains a coin toss in financial markets, and whilst we stick to our August call it is with low conviction. The timing of the UK inflation cycle has caught many economists and commentators off guard. 2023 saw outsized inflation upsides leading to accusations that the Bank had lost control of the price level.

The UK is now about to enter a period of an inflation undershoot - to both the 2% target and G20 benchmarks - and calibrating monetary policy independently, and informally coordinating with the Federal Reserve is a big challenge.

The record of this week’s MPC meeting make it clear that it would only take slightly better news on the likely persistence of inflation to persuade some committee members to vote to cut rates in June, my colleague Larry Elliott writes.

Otherwise, the first move downwards will come in August, he explains:

Huw Pill, the Bank of England’s chief economist, said last year that the path of interest rates was likely to mirror the shape of South Africa’s Table Mountain: steep-sided but with a plateau at the summit.

Judging by the Bank’s latest monetary policy report, Pill and the other eight members of Threadneedle Street’s monetary policy committee (MPC) are now only a few short steps from starting their descent from the mountain top. But they are not quite there yet.

Two MPC members – Swati Dhingra and Dave Ramsden – already think interest rates have been held too high for too long, and so voted for the base rate to be cut from 5.25% to 5%. The real question is how long it will take at least three other committee members to join them.

Not that long, judging by the comments from Andrew Bailey, the Bank’s governor. He said the MPC’s wait-and-see faction accepted that the 14 increases in interest rates between December 2021 and August 2023 were “weighing on activity in the real economy” but wanted to see more evidence that inflation would stay low before voting for a reduction.

The money markets are still indicating that a rate cut next month is effectively a coin toss.

According to interest rate probability data on LSEG, there is 55% of no change at the BoE’s June meeting, and a 45% of a cut to 5%.

Modupe Adegbembo, economist at Jefferies, says the Bank’s MPC “remains track to cut over summer”, but is reluctant to pre-commit to cuts, adding:

Rate cuts are coming, but the decision between June and August is close. On balance our base case remains a cut in August, but upcoming data on inflation and wages remain key.

A UK interest rate cut, when it comes, will not give the government much of a feelgood boost, reckons Charles Hepworth, investment director of GAM Investments.

Further out, markets are still pricing in two 25 basis point cuts for this year, and with inflation forecasts at the BoE revised lower, there is more than enough justification to reduce rates soon.

Sadly, it will be too little and possibly too late for the incumbent Conservative party hoping for a feel-good factor boost in the polls that lower rates could bring. We will have lower rates and a different government this year – that much is certain.”

Henry Cook, senior economist for Europe at MUFG, says the Bank has taken “significant strides” towards a summer rate cut today:

The door is wide open for a cut at the next meeting if data on inflation and wage pressures evolve favourably over coming weeks. This data dependent approach was highlighted in the policy statement and further emphasised by Bailey in the press conference. There will be extra market scrutiny on the upcoming CPI and wage releases.

There was a sense that the BoE clearly wants to push back on the recent hawkish repricing of UK rate expectations following hot US data. Bailey – who made several noteworthy remarks today - said that it is likely that the BoE will need to cut rates “over coming quarters”.

He added that the prospect of a rate cut in June should not be ruled out, but neither is it a “fait accompli”. The explicit mention of the possibility of a move in June is significant. Policymakers have laid what looks like sufficient groundwork now for a cut at the next meeting in the absence of upside surprises on inflation or wage growth.

Konstantinos Venetis, global macro director at TS Lombard, says the Bank could be heading for a “less high”-for-longer stance on rates.

Having opened the door for rate cuts back in February and taken a step closer in March, this month the MPC went a bit further.

Although policymakers stopped short of telegraphing imminent action, their communications point to a rising likelihood that June – by which time we will have two fresh CPI readings plus updated job market data – and August are “live” meetings for the first rate cut.

British chancellor Jeremy Hunt said he wanted “sustainably low interest rates” when asked about the Bank of England’s decision on Thursday to hold rates at 5.25%, Reuters reports.

Hunt told reporters:

“What we want is sustainably low interest rates.

I would much rather that they waited until they’re absolutely sure inflation is on a downward trajectory than rushed into a decision that they had to reverse at a later stage.”

Reuters is reporting that chancellor Jeremy Hunt has said he would rather the Bank of England “took their time”, rather than “having to reverse course”.

IE, by cutting interest rates too soon, and then having to raise them again.

Newsflash: Away from the Bank of England, there’s been a large jump in the number of Americans signing on for unemployment support.

Initial jobless benefit claims rose by 22,000 to 231,000 in the week to 4 May, data from the US Labor Department shows.

That’s the highest level since last August.

Economists had expected a much smaller rise in new claims, to around 210,000.

It may be a sign that the US labor market is weakening, as high interest rates weigh on its economy.

The press conference ends with an attempt to pin Andrew Bailey down about when the Bank might cut interest rates.

Q: You’ve said that a June rate cut is neither a fait accompli nor ruled out – that suggests a 50:50 chance. Does that mean that a cut by August is more likely?

With his innings almost over, Andrew Bailey resists swishing at this attempt to lure him into an indiscretion.

He says the MPC takes its decisions meeting by meeting, and the Bank will have two more sets of inflation and unemployment data to chew through before its meeting in late June.

Asked about the UK labour market, Andrew Bailey says we are close to full employment at the moment.

He says some firms are holding into labour, because they are concerned about the challenge of finding new staff.

Q: Market expectations of UK interest rates have risen since February. Are you comfortable that as you talk about rate cuts, mortgage rates are rising?

Andrew Bailey repeats his earlier point that recent moves to UK market expectations have been pushed up by events in the US, and that British inflation dynamics are actually different.

Q: Is the rise in the minimum wage pushing up inflation?

Andrew Bailey says he is picking up “greater doubts” from businesses about passing on higher wage costs.

Q: There’s been a surge in demand for your short-term repo operations, does that mean banks are facing liquidity problems?

Andrew Bailey says that repo programme exists to prevent short-term borrowing costs going up above target.

[The repo operation it allows banks to get cash from the bank, while handing over assets as collateral, ensuring they can retain access to central bank reserves].

Deputy governor Dave Ramsden says the short-term repo (STR) operation is working as it should, explaining:

“There’s always going to be stuff happening in the repo market, but the STR is doing its job.

“We’re not seeing some ratcheting up more in (money market) rates that might make you think ‘Oh right, so reserves are becoming a bit scarce’.”