© Reuters. A man walks past the Bank of England in the City of London, Britain June 28, 2016. REUTERS/Paul Hackett/File Photo
By William Schomberg and Suban Abdulla
LONDON (Reuters) -Britain’s economy is moving in the right direction for the Bank of England to start cutting interest rates, Governor Andrew Bailey said on Thursday as two of his colleagues dropped their votes for a rate hike.
The BoE’s committee of interest rate-setters voted 8-1 to keep borrowing costs at their 16-year high of 5.25% as the two officials who had previously called for higher rates changed their stance.
Most economists polled by Reuters had expected one member of the Monetary Policy Committee (MPC) to continue voting for an increase in Bank Rate.
But both Jonathan Haskel and Catherine Mann joined the majority in favour of no change. Swati Dhingra again cast the lone vote to cut Bank Rate to 5.0%.
Bailey said there had been “further encouraging signs that inflation is coming down” but he also said the BoE needed more certainty that price pressures were fully under control.
“We’re not yet at the point where we can cut interest rates, but things are moving in the right direction,” he said in a statement.
British government bonds rallied immediately after the announcement. Sterling fell against the dollar and the euro. The five-year gilt yield fell to its lowest level since the BoE’s last policy meeting on Feb. 5, down 11 basis points on the day.
Investors slightly increased their bets on interest rate cuts through 2024, with a 76% chance of a first cut in June and a reduction of 75 basis points now fully priced in by December.
“Every month that passes without an upside inflation or wage growth surprise brings the MPC closer to cutting interest rates,” said Rob Wood, chief UK economist of consultancy Pantheon Macroeconomics.
The BoE decision follows the U.S. Federal Reserve’s announcement on Wednesday that it remained on track for three interest rate cuts this year, prompting stock market rallies.
The European Central Bank has tried to cool talk about a run of rate cuts for the euro zone as investors increasingly consider the fight against global inflation to have been won.
Earlier on Thursday, the Swiss National Bank cut its main interest rate, becoming the first major central bank to relax monetary policy after the surge in inflation globally.
In Britain on Wednesday, data showed consumer price growth fell to its lowest in almost two-and-a-half years.
But the BoE said key indicators of the persistence of inflation were still elevated. It also said Britain’s labour market remained relatively tight despite further loosening and signs that high borrowing costs were weighing on the economy.
“The Bank of England will need to see a lot more moderation in wages and services prices before it starts cutting rates,” Marion Amiot, senior European economist at S&P Global Ratings, said, adding the firm expected a first cut only in August.
Britain’s headline inflation rate – which topped 11% in October 2022 and led to a historic living standards squeeze – remained the highest in the Group of Seven in February at 3.4%.
INFLATION UNDER 2% SOON
The BoE said it expected inflation would drop below its 2% target in the second quarter due to the impact of finance minister Jeremy Hunt’s decision this month to freeze fuel duty once again.
Overall, the measures in Hunt’s March 6 budget statement were likely to increase economic output by about 0.25% over the coming years but would push up inflation by less, it said.
The BoE forecast last month that inflation will creep up again later this year and most analysts and investors have said they think the BoE will cut rates in the third quarter, probably at its August meeting.
The central bank wants to see wage growth slowing further before making its move.
Britain’s minimum wage will rise by nearly 10% next month, and retailers that often pay staff only slightly more have raised salaries ahead of that increase.
Employers overall have offered pay settlements of about 5% since the start of 2024. Average wage growth is about 6%, higher than about 4% in the United States and the euro zone.
As well as employers, mortgage-holders and consumers, the ruling Conservative Party is also keen to see rates come down as it struggles to rein in the opposition Labour Party’s strong lead in opinion polls with an election expected later this year.
Jeremy Hunt took the unusual step of commenting on what Wednesday’s inflation data might mean for the BoE, saying: “As inflation gets closer to its target that opens the door for the Bank of England to consider bringing down interest rates.”
