Interest rates: no change but a change of tone from the BoE

There was no change to the interest rate but a notable change of tone as the Bank of England announced today that it would hold rates at their 15 year high of 5.25 per cent. 

This expected move was the fourth consecutive time that the Bank’s Monetary Policy Committee have left things unchanged, after previously raising rates for 14 times in a row to tame the beast of inflation. 

But today wasn’t just more of the same. It was the first time since the 2020 pandemic that one of the members of the MPC – economist Swati Dhingra – voted not to raise rates or leave them unchanged but, rather, to cut them. 

As for the Bank’s governor, Andrew Bailey, he refused today to be drawn on the likelihood of a cut next time the MPC convenes. 

Inflation, he noted, has fallen a long way from 10 per cent a year ago to its current rate of 4 per cent. And it’s now expected to fall back to the Bank’s target of 2 per cent in the spring – earlier than expected – due to lower energy costs. But we need more evidence that inflation is due to fall all the way back to its 2 per cent target and actually stay there before lowering rates, he added. 

While global inflationary shocks – which have seen the price of energy and food soar – are abating, doubts remain over whether services inflation – for instance, the rising cost of restaurant meals or haircuts – has been sufficiently tamed. 

Bailey also predicts that inflation will rise again slightly in the second half of this year, and cutting rates too early could reignite price rises. 

However, Dr Dhingra, the economist who voted for a cut, is concerned that the impact of previous rate hikes are yet to properly feed through to the economy, meaning there will be more pain to come. And keeping rates too high for too long risks pushing our barely growing economy into an outright recession. 

Reaction’s Maggie Pagano, who has been urging the Bank to be brave and cut rates for quite some time, concurs. 

The UK economy is grinding to a standstill and money supply is contracting sharply – a key indicator which the Bank’s MPC committee has largely ignored, she says. 

The data speaks for itself. Company insolvencies are now at their highest levels since 2009 in the aftermath of the financial crash. This is largely due to higher interest rates and higher debt levels. 

So, when can we expect the Bank to be bold and take the dive? Capital Economics predicts a rate cut in June. By the end of 2025, it forecast that rates will have fallen to 3 per cent. 

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