The Bank of England (BoE) unsurprisingly maintained its key rate at 5.25% on Thursday but said it was “optimistic” about a decline in inflation which should allow it to lower its rates in the coming months.
“With the progress made in ensuring that inflation remains around 2% (…) it is likely that we will need to lower rates in the coming quarters and make monetary policy less restrictive, perhaps more than expected by the market,” declared the institution’s governor Andrew Bailey during a press conference.
On the sidelines of the May report on monetary policy published Thursday, Mr. Bailey said he thinks that inflation “will fall (to a level) close to our target of 2% in the coming months” but wants “more evidence” that this decline will be lasting.
“A change in the interest rate in June is neither excluded nor a fait accompli,” the BoE governor told the press.
Two members of the Monetary Policy Committee (MPC) voted for a quarter-point rate cut, compared to a single vote to do so at the last meeting in March, with the others speaking in favor of maintaining it. of the key rate to 5.25%, its highest level since 2008.
Market participants had anticipated the status quo and are now counting on a first drop in August or even before, and for the majority on two in total this year.
After soaring to 11% at the end of 2022, inflation has largely fallen in the United Kingdom, to 3.2% year-on-year in March. The BoE expects inflation to fall towards its 2% target in April, largely due to a cut in the regulated price of electricity.
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The British central bank forecasts that inflation will “increase slightly in the second half of the year, to around 2.5%”, before falling more sustainably towards its target of 2% in the second quarter of 2026.
Inflationary risks also persist due to geopolitical tensions, especially in the Middle East, “although this has so far had a limited impact on trade and oil prices”, further notes the BoE.
“What we want is sustainably low interest rates, and I think what’s encouraging is that the Governor of the Bank of England, for the first time, has expressed real optimism about our progress,” Finance Minister Jeremy Hunt responded to the Telegraph.
High British interest rates are indeed weighing on the finances of households and businesses.
After initially accentuating its losses after the BoE decision, the pound sterling then gained 0.08% to $1.2509 around 4:10 p.m. GMT.
This improvement came after Mr. Bailey “was forced to reiterate that a rate cut in June has not been decided” commented to AFP Kathleen Brooks, analyst at XTB.
After a series of 14 consecutive turns of the screw started in December 2021, the monetary institution ended its cycle of monetary tightening in September, and opted for the status quo since.
On the activity side, “British GDP growth has strengthened since the start of the year”, specifies the BoE, reversing the trend of the second half of 2023, during which the United Kingdom fell into technical recession.
The British monetary institution estimates that GDP rose by 0.4% in the first quarter, and raised its growth forecasts to 0.5% for the whole of 2024 and 1% in 2025 in the United Kingdom .
Official UK GDP figures for the first quarter of 2024 will be published on Friday.
The increase in British growth forecasts also encouraged stock purchases, pushing the FTSE 100 index, the main index of the London Stock Exchange, to a new historic record at 8,396.25 points.
Mr Bailey also underlined on Thursday that the United Kingdom and the United States were on a different inflation trajectory, which had risen across the Atlantic.
“If inflation falls” in line with its expectations, “the Bank (of England) is unlikely to be deterred” from lowering rates by the fact that the US Federal Reserve begins its monetary easing later than it does. , or by the expected holding of legislative elections in the United Kingdom this fall, concludes Paul Dales, analyst at Capital Economics.
