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The Bank of England has shown a clear indication that cuts may be forthcoming, having voted to maintain the current interest rates.
According to Governor Andrew Bailey, the economy is not currently ready for a decrease in interest rates. However, he did acknowledge that progress is being made after a significant drop in inflation to 3.4% in February, which is close to the target of 2%.
The MPC has decided to maintain the base rate at 5.25% for the fifth time in a row. This is the first time since September 2021 that there was no vote for a rate hike among the nine members of the committee.
Mr Bailey stated that there have been positive indications that inflation is decreasing in recent weeks. The decision was made to keep rates at 5.25 per cent today in order to ensure that inflation reaches and remains at our targeted 2 per cent. While we are not yet able to lower interest rates, progress is being made in the desired direction.
“I acknowledge that there is still room for improvement, but I would like to emphasize that we have received highly positive and promising updates. Therefore, I believe it is safe to say that we are making progress.”
In the February meeting, Jonathan Haskel and Catherine Mann advocated for a 5.5 per cent increase in rates. However, during Thursday’s vote, they joined the majority and decided to keep the rate at 5.25 per cent.
Swati Dhingra, a member of the committee, once again voted in favor of reducing the rates to 5%, the same as her vote from the previous month.
Ruth Gregory, the deputy head economist for the United Kingdom branch of Capital Economics, stated that the Bank of England’s decision to keep interest rates at 5.25% was expected. The MPC members, while no longer voting to increase interest rates, maintained their strict stance.
“It is the data, not the guidance, that holds significance. Our projection, indicating that inflation will decrease more rapidly than anticipated by the Bank, indicates a potential shift in their stance in the upcoming months.”
“We believe there is a possibility for a decrease in interest rates in June and anticipate a decrease to 3% by 2025, instead of the market’s prediction of 3.75-4%.”
The BoE faced backlash from certain areas for raising interest rates too aggressively and being excessively wary of reducing rates, despite the decline in inflation.
Carsten Jung, a senior economist at the IPPR think tank, stated that inflation is decreasing faster than expected, which can be attributed to the recovery of global supply chains and the decrease in energy costs. Additionally, domestic price pressures are also decreasing more rapidly than the Bank had predicted.
The recent actions of the Bank of England suggest that they have imposed excessive restrictions, hindering necessary future growth. Thus, the Bank should expedite their interest rate reductions according to their current timeline. The strict measures taken by both the chancellor and Bank of England have led to the UK’s growth significantly lagging behind the rapid recovery of the USA.
ICAEW’s economics director, Suren Thiru, stated that though it was anticipated for interest rates to remain unchanged, the vote split and meeting minutes indicating a more accommodating approach suggest that monetary policymakers may consider reducing rates later in the year.
“The current cycle of increasing interest rates has now passed, but the significant gap between implementing the tightening policy and its effects on the overall economy means that the consequences of 14 rate increases are still unfolding.”
“The Bank of England remains overly cautious on the prospect of rate cuts given the startling inflation slowdown and an economy in recession, increasing the risk they prolong our economic struggles by keeping policy too tight for too long.”
The response from the real estate sector was varied after homeowners endured 14 consecutive increases in interest rates between 2022 and the first half of 2023, going from 0.1% to the current rate, causing mortgages to skyrocket.
The CEO of Foxtons, Guy Gittins, expressed that homebuyers have been patiently anticipating a decrease in interest rates. Although it is widely predicted to happen this year, it appears that they will have to wait a bit longer. However, it is encouraging that stability has been restored in the UK property market since the rates remained at 5.25% in September of last year. This has contributed to increased levels of buyer activity in recent months.
The CEO of Lomond, Ed Phillips, stated: “After enduring 14 consecutive increases in base rates since December 2021, the recent lack of news on the Bank of England’s decision on interest rates has been a positive for homebuyers in the country.”
“It is understandable that one might feel let down by the lack of a materialized cut, especially in light of this week’s inflation data.”
Source: independent.co.uk
