Bank of England leaves interest rates at 5.25% but signals future cuts | Interest rates

Bank of England policymakers signalled at least three interest rates cuts this year after seeing “encouraging signs” of falling inflation, as they kept interest rates on hold at 5.25% for a fifth time.

The financial markets expect three cuts of 0.25 percentage points this year, forecasting the first to take place in June. The Bank said its survey of financial companies found that they expected rates to fall to 4.5% before the end of 2024.

There has been a sharp decrease in inflation in recent months, with the consumer prices index falling to 3.4% in February. That was still above the Bank’s 2% target, but well below a peak reading of 11.1% in October 2022.

Eight of members of the Bank’s rate-setting monetary policy committee (MPC) voted to hold interest rates, while the ninth, Swati Dhingra, backed a cut of 0.25 percentage points. It was the first time since September 2021 that no one on the MPC voted for a rate rise.

Andrew Bailey, the Bank’s governor, said: “In recent weeks we’ve seen further encouraging signs that inflation is coming down. We’ve held rates again at 5.25% because we need to be sure that inflation will fall back to our 2% target and stay there.

“We’re not yet at the point where we can cut interest rates, but things are moving in the right direction.”

The MPC said it expected economic growth to begin picking up in the second quarter of the year after national output, as measured by gross domestic product, shrank in the second half of 2023, pushing the UK into recession.

Businesses are on course to raise investment levels and higher disposable incomes are expected to lead to an increase in demand for goods and services.

Higher growth would normally increase the pressure on prices, but the government’s cut in fuel duty in addition to recent falls in the price of energy and food is expected to push inflation below 2% in the second quarter.

Inflation is expected to rise again later in the year as the effects of cheaper imported goods and energy wane on the average increase in prices.

The Bank said an escalation in the Middle East conflict posed a big risk to prices, with attacks on shipping in the region emphasising the vulnerability of UK imports and exports.

In a letter to the chancellor, Jeremy Hunt, to explain why inflation remained above 3%, Bailey said the decline in the rate continued to be driven by “an easing in external cost pressures”, while domestic inflation pressures remained more persistent.

A report by the central bank’s regional agents found it was becoming easier for employers to find staff and pay demands had become moderate.

It said: “Recruitment continues to get easier for most [employers]. Some businesses have started to move away from labour hoarding due to a loosening in the labour market.”

However, pay remained elevated and there was little sign of wages growth falling by more than the Bank predicted at its February health check of the economy.